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.

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

E-form AGILE- Consolidation of various registrations along with company incorporation

By Dibisha Mishra ( (


There has been a series of changes brought in by the Ministry of Corporate Affairs (“MCA”) in recent years to bring in better transparency, easier compliance and weed out hurdles in the way of Ease of doing Business. In furtherance of the same, MCA vide notification dated 29th March, 2019, notified Companies (Incorporation) Third Amendment Rules, 2019 (hereinafter referred to as “Amended Rules)[i] which has upgraded the existing SPICe form with a view to bring in a single window system for making application under GST, Employees Provident Fund Organization (‘EFPO’) and Employees State Insurance Corporation (‘ESIC’).

These additional services are being catered via e-form INC-35 named as ‘AGILE’ which shall be  linked with SPICe (e-form INC-32) during filing with MCA. It is to be noted that though linking of the form is mandatory, option of availing the aforementioned services is left to the applicant. The company can very well choose the services which it wishes to avail.

The main features along with the technicalities of the incorporation process prior to the Amended Rules have been covered in our earlier article[ii]. This write up covers the highlights of AGILE along with a brief discussion on some practical aspects. Read more

Brand usage and royalty payments get a new dimension under Listing Regulations

By Abhirup Ghosh & Smriti Wadehra ( (


Usage of common brand is a common practice that we notice among companies which are part of large conglomerates. Often the brands created by one single entity of a group are used by its related parties, however, these transactions are often structured with differential pricing terms i.e. either these transactions are not charged at all or are overpriced.

Therefore, in order to increase transparency and regulate to these transactions, a Committee on Corporate Governance constituted by the SEBI under the chairmanship of Uday Kotak has proposed disclosure requirements this kind of transactions.
In this article we will primarily discuss the proposal made by the Committee threadbare. Additionally, we will also discuss the impact of indirect taxes on such transactions.

Brand usage and Royalty as per Listing Regulations

The erstwhile provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) did not provide anything for royalties or brand usage paid to related parties. However, a SEBI constituted committee under the chairmanship of Mr. Uday Kotak on 2nd June, 2018 provided a report on corporate governance with certain recommendations for implementation. One of the recommendations was to insert provision pertaining to payments made for brand and royalty to related parties.

As noted above, often the transactions involving usage of brands and royalty payments are structured with differential pricing terms. The Committee has noted the importance of brand usage and it also brought the importance of disclosing the terms relating to payments against these brand usages, considering the role it plays in driving the sales or margin.

In this regard, the Committee suggested that where royalty payout levels are high and exceed 5% of consolidated revenues, the terms of conditions of such royalty must require shareholder approval and should be regarded as material related party transactions. The Listing Regulations currently prescribe a materiality limit at ten percent of annual consolidated turnover of the Company. Therefore, the Committee prescribed a stricter limit for brand usage and royalty i.e. 5% instead of the existing limit which is 5% of consolidated turnover.

SEBI applied its discretion to make the provision stricter and subsequently, made the following insertion in the Listing Regulations:

“23(IA) Notwithstanding the above, with effect from July 01, 2019 a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed two percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.”
On reading the aforesaid provisions and basis our discussion, we understand that from 1st July, 2019 transactions involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed two percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

It is pertinent to note that all transactions entered with related party for brand usage and royalty shall always be regarded as related party transactions. However, the trigger point of qualifying such transactions as material related party transaction is when the quantum of payout exceeds two percent of the annual consolidated turnover of the listed entity.

Whether provisions applicable for payments received for Brand usage and royalties?

While the provision talks about royalty payments to be treated as material related party transactions, but what remains to be answered is whether royalty receipts would also be considered as material related party transactions.

Please note that provisions of the amendment clearly provides:
involving payments made to a related party with respect to brand usage or royalty

Therefore, the applicability of the provisions appears to apply only in case of payments made to related party for brand usage and royalty. However, this does not seems to be the intent of law. Every transaction has two parties, in the present case, the two parties are the receiver and the giver. It does not seem rationally correct to include one side of the coin within the ambit of the law while keeping the other side out. Therefore, ideally receipt of royalty must also be treated as material related party transaction for the purpose of Regulation 23(IA) of the Listing Regulations.

Meaning of “Royalty”

Despite insertion of a new regulation dealing with royalty payments, the Listing Regulations do not define the term royalty. The meaning of the term, however, can be borrowed from the Income Tax Act, 1961 which provides for an elaborate definition. Section 9(1) of Income Tax Act, 1961 reads as:

“royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.

Therefore, as per the aforesaid provisions, consideration for transfer of rights (including granting of a licence) in respect of a trade mark or similar property or for use of a trademark or transfer of rights (including granting of a licence) in respect of any copyright, literary, artistic or scientific work, falls under the definition of ‘Royalty’ under the IT Act. Accordingly, any transaction with the related party for the aforesaid activities shall be regarded as related party transaction for usage of royalty.

Similarly, the term ‘brand usage’ has not been defined under the Listing Regulations. In this regard, reference may be drawn from section 2(zb) of the Trade Marks Act, 1999 which identifies brand as a trade mark or label which is an intellectual property right. Accordingly, any transactions of brand usage by related party shall be regarded as related party transaction.

Impact of GST laws on brand usage transactions

After the introduction of regulation 23(1A) it is very clear the companies will have to structure the brand usage transactions properly and pricing policy of the same shall have be relooked at, however, one must not forget the potential impact GST laws can have on these transactions.
Rule 28 of Central Goods and Services Tax (CGST) Rules, 2017 states that all transactions between related persons must be carried out on arm’s length basis and should be priced at open market value. This applies to all transactions between related parties, needless to say even brand usage transactions will also be covered under this.

Therefore, if going forward the parties decide to execute the transactions without any consideration, in order to escape the provisions of regulation 23(1A), the same shall be subjected to rule 28 which provides for computation of notional value and GST will have to paid on the notional value.
However, rule 28 provides for an exception which states that if an invoice is raised by the supplier with GST on it and the recipient of the supply is eligible to claim input tax credit on the value of services, then the value quoted in the invoice shall be deemed to be the open market value of the goods or services.
Therefore, to ensure that notional value taxation does not apply, the parties must refrain from structuring transactions with nil consideration. However, if the same involves royalty payments of more than 2% of the consolidated turnover, it will have to comply with regulation 23(1A).Therefore, the companies must be mindful of both these provisions while structuring this kind of transactions henceforth.


While the Committee does not intend to stop brand usages in the country, all it wants to establish is a fair and transparent practise of charging royalty payments for the usage of brands. Accordingly, listed companies have to be more careful before charging for brand usages, as the same have come under the radar of materiality and have to be reported. Further, considering the tax implications, the structuring of such kind of transaction shall be important. To summarise, the Listing Regulations have introduced a new dimension to payments made for brand usages and royalties.