SEBI proposed amendments in PIT Regulation to incentivize Informants…

By Dibisha Mishra (


SEBI’s recent Discussion Paper[i] on amendment to the SEBI (PIT) Regulations, 2015 presses the fact that mere Regulator’s watch on the illegal transactions are not enough to practically eliminate trading on the basis of UPSI. Wherein insiders are finding new ways to get into such illegal transactions including transactions through proxy, difficulty in tracking and proving the same even if they are tracked remains a challenge for SEBI. Hence, to ensure better tracking and maintain the integrity of the securities market, the regulator is intending to bring in informants to the stage. The informants shall basically be the employees or any other person who observes actual or suspected cases on insider trading. Such mechanism shall have a dedicated reporting window and also provide for near absolute confidentiality to so that the informants are not deterred by the fear of retaliation or discrimination or disclosure of personal data.

Is this altogether a new concept?

Such Informant Mechanism, is not a new concept brought in to tackle the issue of insider trading altogether. Several other regulation though out the globe have been following the same practice. One such example being UK’s Market Abuse Regulation (596/2014) which provides similar kind of reporting mechanism. This concept is similar to ‘Whistle Blower Policy’ for frauds as provided under the Companies Act, 2013. However, SEBI’s Informant Mechanism enables reporting to the regulator directly rather than routing the same to the Company’s management itself. It also takes a step further to incentivize the informants to encourage pro-active reporting.


The salient features of the proposed Informant Mechanism shall be as follows:

  1. Voluntary Information Disclosure Form where information can be reported.
  2. Disclosure on source of information: The information should be original and not sourced from any other person
  3. Office of Informant Protection(OIP): A dedicated department separate from investigation and inspection wings.
  4. Submission of Information: either by himself or through a practicing advocate where the informant decides to report unanimously.
  5. Confidentiality of Informant shall be maintained throughout the proceedings, if any, initiated by SEBI unless evidence of such informant is required such proceedings.
  6. Information reported shall be taken up further if the same is material. Such information may further be forwarded to the operational department for suitable actions only after slashing down the identity details of the informant.
  7. Reporting of the functioning of OIP on an annual basis to SEBI.
  8. A dedicated hotline to guide persons on how to file information.
  9. Grant of reward where information provided as as per informant policy and amount of disgorgement exceeds Rs. 5 crores. The reward shall be paid from IEPF account.
  10. Provision for amnesty.

Few downsides

  1. Smaller cases nor covered: While the proposed Informant Reward Policy is headed to incentivize the informant to promote pro-active reporting of insider trading transactions which were earlier left undetected, the department also proposes to put the minimum threshold for the amount of disgorgement. Only those information revealing insider trading transaction amounting to Rupees Five Crores or more shall be taken up for the purpose of rewarding. This clause itself slashes down majority of comparatively smaller but rather more frequent transactions from coming under its purview.
  2. Material cases: Proposed policy states that only those cases that are material shall be processed further. The official who shall be responsible to determine whether the information is material is nowhere mentioned.
  3. Tracking System: The policy mentions no such system of tracking by the informants regarding the status of information by them.


The discussion paper indicates SEBI’s intention to buckle up its systems for tracking down insider trading transactions and take appropriate action. However, the extent to which the proposed policy gets implemented along with modifications, if any, is yet to be seen.


SEBI’s proposed buyback rules for leverage limits: to what extent practical? Rules impose low leverage limits for NBFCs and HFCs


Pammy Jaiswal

Vinod Kothari and Company


As the regulators eye the performance of business houses at the group level for getting a helicopter view of their economic position, many changes have been brought in this direction. Some of which include the requirement of preparing the consolidated results on a quarterly basis, consideration of profitability and other financial statements on a consolidated basis for the purpose of coming up with an IPO under SEBI ICDR Regulations, 2018 and recommendations of the Kotak Committee for making like changes under the Listing Regulations.

SEBI, going forward in the same direction has issued its discussion paper on the proposed changes in the buy-back conditions on 22nd May, 2019[1].  While one of the proposed changes in terms of computing the buy-back size is on the logical side, the other change on taking the debt to equity ratio on a consolidated basis for certain categories of listed companies is seemingly impractical. This note shall cover the brief of the proposed changes and certain extent of critical analysis on the same.

Buy-Back Conditions

Both section 68 of the Companies Act, 2013 (‘Act, 2013’) as well as SEBI Buy-Back Regulations spell out the conditions for buy-back, some of which are as follows:

  • Authorisation in the Articles of Association and the shares subject to buy-back are fully paid-up.
  • Source of funds for buy-back – Three sources are laid i.e. free reserves, securities premium account and proceeds of the issue of any shares or other specified securities.
  • Buy-back offer size – 25% of the paid-up share capital of the company.
  • Buy-back size – Upto 10% of the paid-up share capital and free reserves with the approval of the Board and upto 25% of the paid-up share capital and free reserves with the approval of the members of the company.
  • Debt to equity ratio post buy-back is not more than 2:1 (except for government companies which are NBFCs and HFCs and can have the ratio not exceeding 6:1).
  • Other conditions as mentioned under the SEBI Buy-Back Regulations, 2018 for listed companies going for buy-back.

Both the legislations till now require that these conditions are met on a standalone basis. However, the discussion paper suggests that considering the threshold on standalone basis may not be giving the correct and complete picture of the parent entity which is going got buy-back of its securities.


Accordingly, the said paper recommends certain changes which are briefly analysed below.


SEBI’s move for conservative computation of thresholds under buy-back


Sr. No. Existing Requirement Proposed change Rationale Our comments
1. Board can approve buy-back to the extent of utilising 10% of the paid-up equity capital and free reserves The threshold of 10%  to be considered on conservative basis (both standalone as well as consolidated basis, whichever is lower) ·      Complete overview of group as a whole;

·      Consolidated financials present the economic position of the entity as a whole along with its potential to serve its obligations.


Considering the lower of the consolidated and the standalone figures should be absolutely fine as no one will be able to take any advantage out of it, however, the change may adversely affect the buy-back size of the listed company.


Especially where the subsidiaries of the listed company have negative net worth, there the limits may substantially go down.

2. Members can approve buy-back to the extent of utilising 25% of the paid-up equity capital and free reserves The threshold of 25%  to be considered on conservative basis (both standalone as well as consolidated basis, whichever is lower) Same as above. Same as above.
3. Post buy-back debt to equity capital to be 2:1 (the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities.) Post buy-back debt to equity capital of 2:1 (the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities) shall be considered on consolidated basis, excluding subsidiaries only if the subsidiaries are regulated and have issuances with AAA ratings


Such subsidiaries should have debt to equity ratio of not more than 5:1 on standalone basis

Considering the situation where the subsidiary of the parent entity has large amount of debt in its books, it is not judicious to exclude such debt while computing the debt to equity ratio for the purpose of calculating the buy-back size. This change is not achievable at all considering the following:

·   NBFCs and HFCs are capital intensive;

·   NHB allows 16 times leverage to HFCs;

·   No NBFCs are running at the leverage of 2:1;

·   Even if the parent entity has surplus capital and the same is put in the subsidiary which is capital intensive, the proposition will be flawed; and

·   Considering the inverse relation between weighted average cost of capital (WACC) and leverage, if the funds are given to the subsidiary, the WACC goes up and the leverage comes down.


While the above changes have been discussed in the paper, it actually calls for change in the legislation itself which when made effective, will give way to these changes. Till such time, the existing framework shall continue to rule the buy-back exercise.

Whether the aforesaid suggestion is for all listed companies?

Para 4.4 of the discussion paper states that the Primary Markets Advisory Committee (PMAC) of SEBI proposed the changes for those companies which have NBFCs and HFCs as their subsidiaries. This implies that the proposed changes are with the intent of restraining the buy-back exercise for those parent companies which have subsidiaries engaged in the business of financing and therefore, have large exposure on their assets.

Further, this implies that the listed companies whose subsidiaries do not comprise of finance companies may still continue with their practice of considering the threshold at standalone basis unless otherwise mentioned.


While the intent of these changes are aimed to make the buy-back conditions more conservative with an overview on the economic status of the entity on a group level, however, it fails to understand the need for a higher leverage for capital intensive entities.



Contribution to disaster relief is now an eligible CSR activity

Munmi Phukon, Principal Manager
Vinod Kothari & Company


The Ministry of Corporate Affairs, on 30th May, 2019 issued a Notification amending Schedule VII of the Companies Act, 2013 (Act) which seeks to include disaster management, including relief, rehabilitation and reconstruction activities under CSR activities. The amendment is very crucial considering the recent history of natural disaster the country had witnessed and this was always an expectation of the corporate sector from the Government.

Provisions of law

The Act through Section 135 puts a social obligation on certain class of companies on the basis their turnover and net profits to spend 2% of the average net profits of past 3 years in the activities mentioned in the Schedule. However, the contribution to any disaster management/ relief activities was not specifically covered in the Schedule except for Prime Minister’s National Relief Fund. This was an insufficiency of law due to which the companies were, in a way, forced to restrict themselves to the PM’s Fund despite of their wish to contribute in other funds or to decline the benefit which the society deserves in such circumstances.

The two- fold benefit

Seemingly, the amendment has come out with a relief to the corporates as well as to the society at large. Therefore, the benefit is said to be a two- fold benefit which, in one hand, will ensure welfare of the society and the environment in need and in the other, it will help the corporates deployment of the minimum allocated CSR fund in needy areas in a more effective way.

NBFCs in troubled waters as Madras Court Bench rules in favour of RBI

The latest judgement by the Madras HC as on 22nd April, 2019 has set aside an earlier single judge order in January this year, and ruled in favour of RBI. RBI argued that there was an appeal remedy available and the companies instead of filing writ petitions with the court could have approached the appellate authority.

However before citing the details of the present judgement, this writer believes a firm background is required to grasp the gravity of the present situation. The reader may feel free to scroll further down, if acquainted with the January single-judge decision beforehand.


Since the Sarada scam in 2015, the Reserve Bank of India (RBI) had been on high alert and had been subsequently tightening regulations for NBFCs, micro-finance firms and such other companies which provide informal banking services. As of December 2015, over 56 NBFC licenses were cancelled[1]. However, recently in light of the uncertain credit environment (recall DHFL and IF&LS) among other reasons, RBI has cancelled around 400 licenses [2]in 2018 primarily due to a shortfall in Net Owned Funds (NOF)[3] among other reasons. The joint entry of the Central Govt. regulators and RBI to calm the volatility in the markets on September 21st, 2018 after an intra-day fall of over 1000 points amid default concerns of DHFL, warranted concern. Had it been two isolated incidents the regulators and Union government would have been unlikely to step in. The RBI & SEBI issued a joint statement on September saying they were prepared to step in if market volatility demanded such a situation. This suggests a situation which is more than what meets the eye.

Coming back to NBFCs, over half of the cancelled NBFC licenses in 2018 could be attributed to shortfall in NOFs. NOF is described in Section 45 IA of the RBI Act, 1934. It defines NOF as:

1) “Net owned fund” means–
(a) The aggregate of the paid-up equity capital and free reserves as disclosed in the latest
Balance sheet of the company after deducting therefrom–
(i) Accumulated balance of loss;
(ii) Deferred revenue expenditure; and

(iii) Other intangible assets; and
(b) Further reduced by the amounts representing–
(1) Investments of such company in shares of–
(i) Its subsidiaries;
(ii) Companies in the same group;
(iii) All other non-banking financial companies; and
(2) The book value of debentures, bonds, outstanding loans and advances
(including hire-purchase and lease finance) made to, and deposits with,–
(i) Subsidiaries of such company; and
(ii) Companies in the same group, to the extent such amount exceeds ten per cent of (a) above.

At present, the threshold amount that has to be maintained is stipulated at 2 crore, from the previous minimum of 25 lakhs. Previously, to meet this requirement of Rs. 25 lakh a time period of three years was given. During this tenure, NBFCs were allowed to carry on business irrespective of them not meeting business conditions. Moreover, this period could be extended by a further 3 years, which should not exceed 6 years in aggregate. However, this can only be done after stating the reason in writing and this extension is in complete discretion of the RBI. The failure to maintain this threshold amount within the stipulated time had led to this spurge of license cancellations in 2018.

However, the Madras High Court judgement dated 29-1-2019 came as a big relief to over 2000 NBFCs whose license had been cancelled due a delay in fulfilling the shortfall.



The regulations

On 27-3-2015 the RBI by notification No. DNBR.007/CGM(CDS)-2015 specified two hundred lakhs rupees as the NOF required for an NBFC to commence or carry on the business. It further stated that an NBFC holding a CoR and having less than two hundred lakh rupees may continue to carry on the business, if such a company achieves the NOF of one hundred lakh rupees before 1-04-2016 and two hundred lakhs of rupees before 1-04-2017.

The Petitioner’s claim

The petition was filed by 4 NBFCs namely Nahar Finance & Leasing Ltd., Lodha Finance India Ltd., Valluvar Development Finance Pvt. Ltd. and Senthil Finance Pvt. Ltd. for the cancellation of Certificate of Registration (CoR) against the RBI. The petitioners claim that they had been complying with all the statutory regulations and regularly filing various returns and furnishing the required information to the Registrar of Companies. These petitions were in response to the RBI issued Show Cause Notices to the petitioners proposing to cancel the CoR and initiate penal action. The said SCNs were responded to by the petitioners contending that they had NOF of Rs.104.50 lakhs, Rs.34.19 lakhs, Rs.79.50 lakhs and Rs.135 lakhs respectively, as on 31.03.2017.

Valluvar Development Finance also sent a reply stating that they had achieved the required NOF on 23-10-2017, attaching a certificate from the Statutory Auditor to support its claim. The other petitioners however submitted that due to significant change in the economy including the policies of the Govt. of India during the fiscal years 2016-17 and 2017-18 like de-monetization and implementation of Goods & Services Tax, the entire working of the finance sector was impaired and as such sought extension of time till 31-03-2019 to comply with the requirements.

Now despite seeking extension of time, having given explanations to the SCNs, the CoRs were cancelled without an opportunity for the NBFCs to be heard.


The Decision

It was argued that there is a remedy provided against the cancellation of the CoRs, the petitioners had chosen to invoke Article 226 contending violation of the principles of justice. The proviso to Section 45-IA(6) relates to the contentions in regards to cancellation of the CoRs.

“45-IA. Requirement of registration and net owned fund –

(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a nonbanking financial institution–

(i) for a period of three years from such commencement; or

(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend,

subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment:

Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.

(7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final:

Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.

The decision was taken on two grounds. First, the statute specifically provides for an opportunity of personal hearing besides calling for an explanation. The amended provision is very particular that opportunity of being personally heard is mandatory, as the very amendment relates to finance companies, which are already carrying on business also. Not affording this opportunity would cripple the business of the petitioners.

Second, the amended section provides NBFCs sufficient time to enhance their NOF by carrying on business and comply with the notifications. For the aforesaid reasons, the orders by the RBI requires interference. Resultantly, the respondents (RBI authorities) are directed to restore the CoR of the petitioners and also extend the time given to the petitioners.


The Latest Judgement

The judgement pronounced as on 22nd April, 2019 was an appeal by the RBI to the aforementioned writ petitions. This latest decision which ruled in favour of the RBI had contentions on several grounds. However, all of them stem (invocation of sub-clauses) from the following four.

First, the RBI against the order in the writ petitions submitted that there is an appeal remedy available and the petitioners without availing such remedy have filed the petitions and as such petitions ought not to have been entertained.

Second that there were only four such companies (the ones above) who sought writ petitions and the remaining numbering more than 40 Non-Banking Financial Companies (NBFCs) have filed statutory appeals and therefore, the petitioners should be relegated to avail the appeal remedy.

Third, the present cancellation is owed to the petitioners’ failure to comply with the NOF conditions issued by the RBI. The notification dated 27.03.2015 specifying 200 lakhs as NOF for NBFCs to carry or commence operations has not been challenged by the petitioners. Therefore, if they do not achieved the said conditions, they cannot to continue to remain in business.

Fourth, it was submitted that the reasons assigned by the petitioners in the reply to the show cause notice were considered and the reasons not being sustainable were thus rejected.



This was a landmark hearing in the case of NBFCs with increasing pressure as of recent times. Many NBFCs may now apply for restoration of their licenses as per the present laws or file for statutory appeals. The case stands as an indication of the firm regulatory policies of the RBI amidst the environment of credit uncertainty. The last statement of the judgement also stands apt here. The brief sentence read, “Consequently connected miscellaneous petitions are closed.”






Concerns on Going Concern: Proposed amendments in Liquidation Regulations need relook

–  Vinod Kothari


The possibility of going concern sales in liquidations, visualised by Adjudicating Authorities in several early cases, got a regulatory recognition vide IBBI (Liquidation Process) (Second Amendment) Regulations, 2018. Since then, there has been a lot of work on how exactly will going concern sale work in liquidation. Our previous write- ups on going concern sale are Liquidation sale as going concern: The concern is dead, long live the concern! and Enabling Going Concern Sale in Liquidation. IBBI itself has organised several meetings around this; there have been meetings organised by other groups such as Society of Insolvency Practitioners of India (SIPI).


Recently, the IBBI released a draft of the amendments to the Liquidation Regulations[1], which includes regulatory amendments pertaining to going concern sale as well.


This Note highlights the need to have a relook at these proposed amendments, in context of going concern sale.

Read more

Anomaly relating to much awaited e-form DPT-3

By CS Smriti Wadehra |



MCA on January 22, 2019 had issued a Notification[1] prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014 (‘Rules’) requiring every company (except government companies) to file:

  • a return of deposit;
  • particulars of transaction not considered as deposit; or
  • both

It is a one-time filing return, specifying the details of outstanding receipt of money or loan which have not been considered as deposits under the Rules. For filing the said dorm, the Rules specified that the reporting should be of receipt of money or loan from April 1, 2014 till January 22, 2019 and which are outstanding as on the date of filing. Further, the reporting should be done within 90 days from January 22, 2019. However, the e-form for such filing was not released by MCA.

Thereafter, on April 30, 2019, MCA vide its Notification[2] dated April 30, 2019 notified the Companies (Acceptance of Deposits) Second Amendment Rules, 2019, according to which the reporting in the one-time return (i.e., e-form DPT-3) has to be done for receipt of money or loan from April 1, 2014 till March 31, 2019. Also, the filing due-date has been extended to ninety days from March 31, 2019.

This extension was much required as the electronic version of the said form was not released by MCA. However, MCA has on the same day released the e-form as well and hence, we shall now discuss the requirements of the said form.

Requirement of Law

Referring to the erstwhile notification read with the recent general circular of MCA dated April 13, 2019, we may summarise the reporting requirement of e-Form DPT-3 as under:

  1. One time return giving the details of the outstanding receipt of money or loan which have not been considered as deposits as per Rule 2(1)(c) of the Rules for the period from 1st April, 2014 till 31st March, 2019;
  2. Periodic return which will give the details of particulars of transactions which are not considered as deposits as per Rule 2(1)(c) of the Rules within 30th June of every year containing details as on 31st March;
  3. Return for deposit which is to be filed within 30th June of every year.

At the advent of notification of the Rules, companies were under ambiguity as to how the reporting of such one-time return shall be done. Further, the e-Form also required auditor’s certificate as an attachment, but it was unclear that whether companies whwich have not received any amount as deposit were also required to provide an auditor’s certificate in this regard. Moreover, there were confusion as whether companies have to provide audited figures in the said form or otherwise. However, the e-Form was expected to clear these confusions.

Anomaly in e-Form

Even after the release of the much awaited form, the anomaly still exists. Following are the certain ambiguities in the e-Form, for which MCA’s clarification shall be awaited:

a)    Whether DPT-3 required to be filed twice?

Rule 16 of Companies (Acceptance of Deposits) Rules, 2014 provides:

“Explanation.- It is hereby clarified that Form DPT-3 shall be used for filing return of deposit or particulars of transaction not considered as deposit or both by every company other than Government company.”

Further, the provisions of Rule 16A of Companies (Acceptance of Deposits) Rules, 2014 provides:

“Every company other than Government company shall file a onetime return of outstanding receipt of money or loan by a company but not considered as deposits, in terms of clause (c) of sub-rule 1 of rule 2 from the 01st April, 2014 to the date of publication of this notification in the Official Gazette, as specified in Form DPT-3 within ninety days from the date of said publication of this notification along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.”

On the combined reading of the aforesaid provisions, we understand that companies have to file e-Form DPT-3 as an annual requirement only, as  a return of deposit of transactions not considered as deposits every year by 30th June and also as a one-time return of outstanding money not considered deposits from 01.04.2014 to 31.03.2019. However, the e-Form as well as the Rules does not specify any such requirement. Accordingly,  companies are still under the ambiguity as – whether  filing of only  one-time return shall suffice for this financial year or two separate filing has to be done.

b)    Requirement of attaching auditor’s certificate

The e-Form DPT-3 requires companies to attach auditor’s certificate. Though not mandatory attachment, the companies are unclear as to whether the amount to be mentioned in the return has to be audited by a statutory auditor and a certificate of auditor has to be attached in each case or management certified accounts shall suffice? The e-Form does not clarify the instance.

Further, companies which shall be filing that they have not accepted any deposit or the money accepted does not qualifies to be a deposit – in such case, it is still unclear whether the auditor’s certificate certifying the company’s declaration is required or not.


Despite the time taken by the Ministry for coming up with the e-Form, we understand that there are still many irregularities in the e-Form as discussed briefly in our note and which has to be addressed by the Ministry. Meanwhile, considering the first day of deployment of this e-Form, we assume that there will be certain revision in the said form which might address the ambiguities.

You may also read our article on “MCA requires reporting of ‘what is not a deposit’ here- Link to the article


Understanding ACTIVE and its difficulties

Dibisha Mishra ( (


Ministry of Corporate Affairs (‘MCA’) vide its notification dated 21st February, 2019 brought the Companies (Incorporation) Amendment Rules, 2019 which shall be effective from 25th February, 2019. The aforesaid amendment mandated every company incorporated on or before the 31st December, 2017 to file e-form ACTIVE (Active Company Tagging Identities and Verification) on or before 25th April, 2019.

Further, in view of the practical difficulties faced by the stakeholders, MCA vide its notification dated 25th April, 2019 extended the time limit for filing the said e-form till 15th June, 2019.

This note covers the significant aspects on the ACTIVE form and practical difficulties faced by the stakeholders for bringing the same to the notice of the concerned authorities. Read more