MCA attempts to realign RPTs with Listing Regulations

By Vinita Nair (

Companies will have a tough time in complying with ever changing provisions relating to RPTs. In view of several recommendations made in the Company Law Committee report (CLC Report) dated 1st February, 2016, Companies (Amendment) Bill, 2016 (Bill, 2016) was introduced in Lok Sabha on 16th March, 2016[1], 37th Standing Committee Report of December, 2016 and Companies (Amendment) Bill, 2017 (Bill, 2017) as passed by both Houses of Parliament. .

Key concerns relating to RPTs that were discussed in the CLC Report:

  • Companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company;
  • Lack of clarity among stakeholders on the extent of responsibility entrusted to the Audit Committee, and whether Audit Committee has been specifically mandated to approve or modify all related party transactions;
  • Absence of provision enabling Audit Committee to ratify RPTs entered into by the companies;
  • Inconsistency with provisions under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) with respect to transaction between holding company and its wholly owned subsidiaries;
  • Misinterpretation of MCA Circular no. 30/ 2014 clarifying the requirements of second proviso to section 188 (1) and need to withdraw the same;

Proposed amendments in Companies (Amendment) Bill, 2017


This article analyses the amendments proposed and whether same bridges the gap between the provisions of Listing Regulations and Act, 2013.

Definition of related party

With the intent to capture companies incorporated outside India within the purview of meaning of related part, words ‘any company’ reflecting in clause (viii) of sub-section (76) of section 2 of Act, 2013 was substituted with ‘any body corporate’ in Bill, 2016. The revised provision read as under:

“(viii) any body corporate which is –

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary;

(C) an investing company or the venturer of a company”


Instead of replacing ‘company’ with ‘body corporate’ in the aforesaid clause, the correct amendment would have been inserting an explanation similar to explanation (c) to section 2 (87) in the definition of associate company under section 2 (6) of Act, 2013. In the absence of the same, the term ‘associate company’ cannot include associates incorporated outside India.

In case of a subsidiary and holding company, by virtue of explanation (c) to section 2 (87), company includes a body corporate. However, if the intent was to make it absolutely clear, an explanation similar to explanation (c) aforesaid could be inserted in section 2 (46).

Bill, 2016 further proposed to insert a new sub-clause to cover ‘investing company’ or ‘venturer of a company’ within the ambit of related party. The intent was to cover upstream entities, i.e. the companies making investment, within the ambit of related party. The current definition of ‘associate company’ regards the entity in which the investment is made, as a related party. For example A Ltd exercises significant influence over B Ltd. Therefore, B Ltd is a related party of A Ltd but vice versa is not true. However, by virtue of the proposed amendment A Ltd (the investing company) will be regarded as related party to B Ltd. But there was a huge gap as the proposed amendment in Bill, 2016 had the possibility of leading to an understanding that every investing company (even if investing 1-2%) will be a related party. This certainly was not the intent for the amendment.

Similarly, definition of associate company includes a joint venture company. As explained above, the intent is to cover upstream entities. Therefore, the term ‘venturer of a company’ means the company investing in the joint venture and not fellow-venturer. For example A Ltd & B Ltd formed a joint venture entity C Ltd. C Ltd is a related party of A Ltd ( vice versa not holding being true), however, A Ltd & B Ltd are not related parties. By virtue of proposed amendment, A Ltd being the venture will be a related party of C Ltd. The manner in which the sub-clause (C) has been worded may lead to confusion that the fellow-venturer is also a related party.

Bill, 2017 inserted an explanation in Section 2 (76) to bridge the gap to the following effect:

“Explanation- For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.”


Scope of Audit Committee in approving RPTs

Section 177 of Act, 2013 specifies the scope of Audit Committee with respect to approving the transactions entered into with related parties and subsequent modifications thereof. The reason behind the same is that the Audit Committee comprises of majority of independent directors i.e. disinterested members of the Board. The transactions for which Audit Committee approval needs to be obtained, are not limited to those specified under section 188 (1) (a) to (g) but all transactions entered into with the related parties specified under section 2 (76). In case of listed entities, the scope expands to all related parties under section 2 (76) and applicable accounting standards (i.e. AS18 or IND-AS 24 as the case may be). While section 177 does not specifically mandate prior approval, the CLC report has clearly specified that the existing requirement to pre-approve all RPTs should continue.

Bill, 2017 proposes to insert a proviso in section 177 (4) (iv) mandating Audit Committees to submit its recommendation to the Board on such transactions, other than transactions referred to in section 188, where Audit Committee does not approve the same. Transactions entered into under section 188 (1) that are not in the ordinary course of business and/or not on arm’s length basis anyways require prior approval of Board by virtue of section 188 (1).

As evident from the proposed amendments to Section 177, there seems to have a vertical distinction made in relation to transactions covered under section 188 and those not covered under the same. Power to ratify transactions have been granted only for any transaction involving any amount not exceeding 1 crore rupees. This seems to be contradicting with the provisions relating to omnibus approvals, as provided under proviso to sub-rule (4) of Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 as reproduced hereunder:

“Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.”

The proviso above grants a deemed omnibus approval for such transactions. Why will the need to ratify such transactions from Audit Committee ever arise? While the intent was to address the concern of possible misuse of the flexibility to ratify transactions within 3 months from the date of transaction, the committee recommended prescribing an upper threshold of 1 crore rupees. However, the same appears to be inconsistent with the existing provisions of the Act, 2013. If the said ratification is not obtained, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it.

Further, what will be the fate of RPTs exceeding value of Rs. 1 crores, not placed before Audit Committee for prior/ omnibus approval remains unanswered. In case Audit committee disapproves any transaction, the Board may still consider approving the same subject to ensuring compliance of section 177 (8).

Approval in case of transaction between holding company and WOS

Listing Regulations as well as erstwhile Clause 49 exempted the transaction between holding company and its wholly owned subsidiary[2] from the requirement of obtaining prior approval of Audit Committee and shareholder’s approval in case of same being material RPTs. Provisions relating to granting of omnibus approvals, in order to align the provisions with Clause 49/Listing Regulations, were inserted vide Companies (Amendment) Act, 2015 and were enforced with effect from 15th December, 2015. However, corresponding exemption in case of transactions between holding company and its wholly owned subsidiary were not provided under Section 177 (4) (iv).

Bill, 2017 has made an attempt to exempt such transactions by way of inserting the following proviso:

“Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.”

The insertion seems to provide that transactions between holding company and wholly owned subsidiaries that are entered into under section 188 (1) still require approval of the Audit Committee by virtue of omnibus or specific approval. Exemption granted for transactions between holding company and wholly owned subsidiary under Section 188 (1) does not exempt from the requirements of obtaining approval of Audit Committee under Section 177. The proposed amendment will fail to fill the gap in the provisions as compared to Listing Regulations.

Scope of approval of Audit Committee under Act, 2013 is presented below in the form of a flowchart:


Shareholder’s approval for RPTs moves to majority of minority regime

Transactions specified under section 188 (1) (a) to (g) entered into not in the ordinary course of business and/or not on an arm’s length basis will require prior approval of shareholders in case such transactions exceed the amounts specified under Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 as amended from time to time.

In case of shareholders approval obtained under Clause 49/ Reg. 23 of Listing Regulations, all related parties are required to abstain from voting on such resolutions. However, in case of approval obtained under section 188 it was clarified by virtue of MCA Circular no. 30 of 2014 dated 17th July, 2014 that related parties who are parties to such contracts being approved, shall abstain from voting. The proposed insertion as well the recommendation in the CLC report clarifies that the intent always was to mandate all related parties to abstain from voting. Accordingly, Bill, 2017 proposes a carve out by exempting companies in which ninety percent or more members, in numbers, are relatives of promoters or are related parties, from complying with the said requirements. The objective is to remove the difficulty faced by closely held public companies while obtaining approvals for such transactions.

The proposed amendment will lead to interesting scenarios, as discussed below:

Case 1 – Shareholding pattern of A Ltd comprises of B Ltd holding 91% of paid up capital and 100 shareholders holding remaining 9% of paid up capital.

In this case, since B Ltd does not hold majority of shares in numbers, the ones holding 9% of paid up capital will decide the fate of the RPTs. If they choose to block the RPTs, there is no way to get the same approved unless the RPT is in ordinary course of business and on arm’s length basis.

Case 2 – Shareholding pattern of X Ltd comprises of Mr. Y (promoter) along with one of his relative holding 91% of paid up capital and Z Ltd (an unrelated entity) holding 9% of the paid up capital.

In the instant case, Mr. Y and his relative need not abstain from voting on the transaction as they hold majority of shares in numbers.

While numerical majority has always been considered in cases such as amalgamations and mergers, but RPTs involves a far more frequent exercise of majority wishes than a corporate restructuring. Is it worthwhile that even with over 90% shareholding strength, the majority cannot have its way? There are several situations where the minority may use this as a power of blackmail. On the contrary the ends of justice are better served by the minority giving the right to seek redressal under oppression relief provisions. After all companies have to continue to run based on shareholding majority.


Private and Government companies remain exempt

MCA exemption notification dated 5th June, 2015 exempted private companies from complying with the second proviso to section 188 (1). By virtue of similar notification dated 5th June, 2015 government companies are exempted from the requirement of complying with first and second proviso of section 188 (1) in following cases:

  1. a) in respect of contracts or arrangements entered into by it with any other government company;
  2. b) in respect of contracts, other than those covered above, entered into by unlisted government company by obtaining prior approval of the Ministry or Department of the Central/ State government which is administratively in charge of the company.

However, no exemption has been provided under Section 177 for approval of Audit Committee or under section 188 (1) from obtaining approval of the Board.

Power to ratify by the Shareholders

Lastly, Bill, 2017 provides an option to the shareholders to regard such contracts or arrangement as voidable, that are entered into by a director or any other employee, without obtaining prior approval by way of a resolution under sub-section (1) or without getting the same ratified within three months from the date of entering into such contracts. The proposed amendment fills the gap that existed in case of RPTs for which prior approval or ratification was not obtained. It seemed improper to grant the power to the Board to ratify the same.

Scope of approval by shareholders has been presented below in the form of a flowchart.

Amendment proposed in Listing Regulations in UKC Report[3]


Report of the Uday Kotak Committee on Corporate Governance issued on October 5, 2017 proposed following amendments in Listing Regulations in relation to RPTs:

Disclosure Requirement:

  • Half yearly disclosure of RPTs on a consolidated basis, in the disclosure format required for RPT in the annual accounts as per the accounting standards, on the website of the listed entity within 30 days of publication of the half yearly financial results. Copy of the same to also be submitted to the stock exchanges.
  • The annual report shall include disclosure of transactions of the listed entity with any person or entity belonging to the promoter/promoter group which hold(s) 10% or more shareholding in the listed entity, in the format prescribed in the relevant accounting standards for annual results;


  • Insertion of a proviso that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall also be a related party:


  • All material related party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

Materiality in case of brand usage or royalty

  • 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, exceeds five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.


While MCA has made a decent attempt to align the provisions of Section 188 with that of Listing Regulations, Bill 2017 does not ensure absolute alignment and leaves few gaps unfilled. In the meantime, SEBI is in the process of inching forward by imposing stricter restrictions on listed entities.




[2] whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval



SEBI asks companies to strengthen controls on handling of UPSI

by CS Vinita Nair, (


SEBI framed SEBI (Prohibition of Insider Trading) Regulations, 2015 (the Regulations) to combat the wrong of trading in securities with the advantage of having asymmetrical access to unpublished information which when published would impact the price of securities in the market. Originally framed in 1993 and thereafter, replaced with revised regulations in 2015.

The Regulations mandates listed entities to frame Code of Conduct for Prohibition of Insider Trading and Code of Fair Disclosure. The Code of Conduct is for all employees and connected persons to adhere and comprises of requirement of pre-clearance of trade, disclosure of trade, prohibition to trade when the trading window is closed, restriction on contra trade and reporting of violations to SEBI and taking disciplinary action against those who violate the Code of Conduct. In order to ensure successful implementation of Code of Conduct, it is of utmost importance to sensitize the employees about the requirements of the Regulations and the Code of Conduct, what is expected out of them, what are the Do’s and Don’ts that such employees and connected persons are required to adhere to. Additionally, the Compliance officer is also expected to carry out timely reporting to Chairman of Audit Committee/ Board, maintain grey list, ensure the employees update the list of immediate relatives, ensure that action is taken against those who violate the Code.

SEBI order in case of Axis Bank

SEBI vide order dated December 27, 2017[1] issued directions to Axis Bank Ltd in respect of leakage of UPSI relating to financials through social networking thereby requiring Axis Bank Ltd to submit information regarding the processes controls that it has in place regarding handling of UPSI. This is relevant for all other listed entities as preparing of periodic financials is a regular phenomenon and is definitely an UPSI. SEBI attributed such leakage to the inadequacy of the processes / controls / systems that Axis bank as a listed company had put in place. SEBI stressed on the fact that while procurement or communication of UPSI  by  any  person  is identified as a violation of regulation 3 of PIT Regulations and section 12A(e) of the SEBI Act, it becomes incumbent upon every listed company to put in place.

SEBI ordered Axis Bank to strengthen its processes/ systems/ controls to ensure such instance is not repeated in future and to conduct an internal inquiry into the leakage of UPSI and take appropriate action against those responsible for the same, in accordance with law. The scope of enquiry prescribed included but not limited to determination of the possible role of following persons in relation to the aforesaid leakage of UPSI:

  1. Persons / members of committees involved in generation of the original data for the purpose of determination of  key figures pertaining to financial figures including GNPA, NNPA, NIM, Slippage, Write-off, CASA, etc.
  2. Persons involved  in  the  consolidation  of  the  figures  for  the  financial results.
  3. Persons involved in the preparation of board notes and presentations.
  4. Persons involved in dissemination of information  relating  to  financial  results in the public domain.
  5. Any other persons who had access to the information.

SEBI provided a timeline of 3 months from the date of order and asked to file a report to SEBI within 7 days from completion.

In the past, in case of Palred Technologies Limited[2], SEBI had charged a facebook ‘mutual friend’ whose trading pattern was found in deviation from the established trading pattern and when he could not reply to specific details sought by SEBI.

What’s in store for others

There is definitely a need for all other listed entities to revisit and ensure the sanctity of its own controls and processes in relation to handling of UPSI. The extent to which the employees have been sensitized will determine the effectiveness of the processes and controls. Needless to say, any such instance affects the credibility and reputation of the listed entity.

All the listed entities frame the two codes required under the Regulations, put up FAQs on the intranet and monitor the trading of the designated persons and other connected persons. But it is very essential to test the effectiveness, to re-visit, to sensitize the employees again and again, to make them aware of the repercussions of violating the Regulations or the Code.

Areas to sensitize

  1. Educating all insiders about the sensitivity of information and the need to restrict disclosures on “need to know” basis;
  2. Educating all such executives who deal with sensitive information to ensure strictest confidentiality;
  3. Ensuring that there is adherence to Company’s internal code/protocol while speaking to press/public forums;
  4. Ensuring that trading in securities of any other company, in respect of whom the company’s executives have UPSI, is barred;
  5. Ensuring that the investment team/investment committee/ research desk of the company has “chinese wall” protection from such team as may have UPSI in relation to clients;
  6. Ensuring that trading by all employees in company’s securities are disclosed, if such trades are in excess of the stipulated amount every quarter;
  7. Ensuring that DPs are aware of closure of trading window;
  8. Ensuring that DPs take prior approval for any trading while trading window is open;
  9. Ensuring that DPs are aware of contra trade restrictions;
  10. Ensuring that flow of information is clear from the respective HoDs to the compliance officers for maintenance of grey/ restricted list;
  11. Educating on the requirement to have differential closure of trading window depending on the nature of UPSI and manner in which information is to flow;
    • For eg. the M&A team must be aware about likelihood of any acquisition and deal dynamics even before it is put up before the Board or Committee for sanction. The trading window for such team cannot commence at same time when the window is closed for those preparing board notes, agenda etc. The closure for them will commence earlier and this will be required to be communicated by the respective HoD to the compliance officer.

What should the SOP cover?

A Standard Operating Procedure (SOP) may be separately framed to implement to Codes under the Regulations or this may be incorporated in the Code itself. Apart from the introduction and provisions of law, the SOP should cover following:

Parameter Points to be covered
Dealing in securities ·         The employees shall be informed about period when the employee including his/her Immediate Relatives shall not trade;

·         The employee shall be required to seek permission of respective HoD or Compliance Officer before sharing of an UPSI for legitimate purpose/ on a ‘need to know basis’ i.e. for performance of duty or discharge of legal obligations. While seeking permission, the need to know requirement shall be justified. Till receipt of sanction, the information shall not be shared.

·         The HoD/ Compliance Officer sanctioning such a requirement may mandate entering of NDA and any other compliance arising under the Code for such designated person.

Updating information ·         The listed entity shall provide a robust system to ensure timely updation of list of immediate relatives by designated persons, online application for pre-clearance, reporting of trade, submitting disclosure, seeking permission for sharing of UPSI for legitimate purposes in order to do away with the excuse of not being able to send information on time;


Period of Trading Window closure ·         It is not relevant whether the intimation of trading window closure is given to stock exchange or not. The closure is for the insiders and not outsiders. Therefore, the Code/ SOP should clearly specific tentative period when the trading window shall remain closed.

·         The Compliance Officer in consultation with executive director shall have the power to decide and close the trading window for any other period during which certain identified employees shall be prohibited from trading in securities of the Company or any other company of which such employees is expected to have access to UPSI.

·         The period of closure shall be informed to the employees by way of intranet and/or email. The email should mandate a read receipt.

Pre-clearance and Reporting of Trade undertaken ·         The employees shall be sensitized about the requirement to seek pre-clearance and also to report the trade undertaken pursuant to such trade.

·         When the trade is reported, immediately an email can be sent intimating about the contra trade restrictions.

·         Instances when a waiver will be granted should be adequately captured in the Code and also sensitized to employees.

·         The RTA should also be given the details of PAN of the designated employees to be able to pull out the beneficiary position of such DPs separately in order to track the change in holding of shares.

Responsibility of Compliance Officer ·         The Compliance Officer shall sensitize the employees on recent orders, informal guidance given by SEBI in simplified manner;

·         The Code shall provide the option to contact the Compliance Office in case of any doubt/ confirmation in relation to Regulations to ensure that employees don’t sleep walk into non-compliance.

·         Regular tracking of trades by employees, issuance of warning letters, periodic internal reporting, taking disciplinary action and informing SEBI of violation of Code by DPs.

Chinese Wall mechanism ·         The access to those departments that are expected to be in possession of UPSI should be restricted;

·         Within such departments, use of cell phones/ gadgets which could potentially aid in sharing UPSI should be avoided;

·         The documents/ records/ systems storing UPSI should be stored with password protection or other security feature that the entity adopts in general;

·         Strict instruction shall be given in relation to manner of handling of such records for legitimate purpose till the particular UPSI becomes a generally available information.



Unlike other SEBI Regulations, this Regulation is required to be complied by the listed entity as well as its employees and connected persons. Therefore, the onus is on the listed entity to sensitize, facilitate, monitor and report.




Ready Reckoner –SEBI’s Corporate Governance Report

SEBI’s Yet Another Move to Ensure Minimum Public Shareholding

By Parul Bansal, (


With the development of the economic conditions of the country, various investors including the retail investors are stepping into the securities market with the intention to earn higher return on their investments which has lead to large portion of their income being invested in shares, bonds or securities of listed companies. At this juncture, return on their investment is proportionate to the growth of listed companies. Therefore, their destiny in the stock market lies at the mercy of management and promoters of listed companies.

Stock Exchange Board of India (“SEBI”) with an endeavor to prevent the investors from the monopoly of the listed companies and to debar/prevent the undesirable/illegal transactions has enacted Securities Contract (Regulation) Act, 1956 (“SCRA, 1956”) and Securities Contract (Regulation) Rules, 1957 (“Rules, 1957”) thereof.

Minimum Public Shareholding (“MPS”)

Listed Companies are those companies of which shares are listed on the stock exchange and certain percentage of such shareholding is available for the public to trade in with transparency and liquidity. If large portion of the shareholding of listed companies remain blocked in the hands of the promoters, subsidiary or associate company then the intent of listing such securities is breached and becomes redundant. The promoters will be at liberty to manipulate the price and the market tricking will be easy. This will also reduce the floating capacity of the securities of the company due to less liquidity.  Ministry of Finance vide press release dated June 4, 2010 has also stated that:

A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. Further the larger the number of shareholders, the less is the scope for price manipulation.”

To prevent such abuse, sub-rule 19 of the Rules, 1957 specifies the conditions for initial and continuous listing of a company.

Initial Listing

As per regulation 19(2)(b) of the Rules, 1957, any company proposing to list its securities shall maintain MPS as mentioned below based upon the post issued share capital of the company:

  Post issued share capital at offer price MPS (minimum)
1 Less than or equal to INR 600 crores 25% of each class or kind of equity shares or

debenture convertible into equity shares issued by the company

2 More than INR 600 to INR 4000  crores Such % of each class or kind of equity shares or debentures convertible into equity shares issued by the company equivalent to the value

of four hundred crore rupees

3 More than INR 4000 crores 10% of each class or kind of equity shares or debentures convertible into equity shares issued by the company
In case of 2 and 3, company shall attain MPS equal to 25% within 3 years from the date of listing its securities

Relaxation by SEBI

SEBI has, vide circular dated March 10, 2017, laid down criteria for Schemes of Arrangement by Listed Entities and relaxation under Rule 19 (7) of the Securities Contracts (Regulation) Rules, 1957 (SCRR). Further, to align with the rules of Rule, 1957, amendments were carried out therein through circular dated September 21, 2017.

Pursuant to aforesaid circulars, any listed issuer may for the purpose of arrangement submit a draft scheme of arrangement under sub-rule 19 of Rules, 1957 for seeking relaxation from the applicability of strict provisions of sub-rule 19(2) of Rules, 1957, for listing of its equity shares on a recognized Stock Exchange without making an initial public offer, on satisfying the conditions as mentioned in para III of Annexure I thereof. In terms of such conditions at least 25% of the post-scheme paid up share capital of the transferee entity shall comprise of shares allotted to the public shareholders in the transferor entity. However, on fulfillment of following condition, requirement to attain such MPS may be waived off:

  1. The entity has a valuation in excess of INR 1600 crore as per the valuation report;
  2. The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity is not less than INR 400 crore;
  • At least 10% of the post-scheme paid up share capital of the transferee entity comprises of shares allotted to the public shareholders of the transferor entity; and,
  1. MPS of 25% shall be attained within a period of one year from the date of listing of its securities and an undertaking to this effect is incorporated in the scheme” .

Continuous Listing

Pursuant to sub-rule 19A of the Rules, 1957 every listed company including the Public Sector Company shall maintain MPS of 25% of the total shareholding of the Company. Initially, limit for the Public Sector Companies was fixed at 10% but later on the same was also increased from 10% to 25% to provide equal footing to listed companies and PSUs.

What if MPS is less than 25% in case of continuous listing?

Pursuant to proviso of sub-rule 19A of Rules, 1957, every listed company which is not meeting the minimum public shareholding specified under sub-rule 19 of the Rules, 1957 shall in accordance with the provision of sub-rule 19A accomplish the same within the stipulated time period which is 4 year from the date of commencement of SCRA Amendment Rules, 2014 i.e. by January 15, 2018. Earlier the time specified was upto January 15, 2017 and listed companies failing to comply with the same has faced severe consequences in past. Albeit, strict steps have been taken by SEBI against such companies, public shareholding of such companies was still below the requirement. Therefore, SEBI has, once again vide circular on July 03, 2017, extended the time limit for achieving the minimum public shareholding by one year i.e. January 15, 2018.

This extension of time yet again by SEBI is a clear indication of the its accommodative and perceptive regulatory approach and takes cognizance of the need for a reasonable timeframe within which non-compliant companies may take remedial action with respect to public holding requirements. SEBI has not only increased the time limit for bringing the public shareholding within specified limits but has also amended various Regulations and Acts thereof for achieving the requirement of minimum public shareholding.

Steps taken by SEBI to achieve minimum public shareholding

SEBI has vide circular dated December 16, 2010 and August 29, 2012 specified the methods for complying with the minimum public shareholdings such as  issuance of shares to public through prospectus, offer of shares held by promoters to public,  right issues/ bonus issue to public shareholders with  promoters or promoter group shareholders forgoing their entitlement,  etc.

Subsequently, another circular was issued by SEBI on February 08, 2012 through which listed companies were allowed to achieve minimum public shareholding through institutional placement programme. Along with the aforesaid, SEBI has also specified that listed companies desirous of achieving the minimum public shareholding may approach SEBI with the appropriate details and the same will be entertained by it on the basis of merits.

Result of non-compliance

Despite aforementioned efforts of the SEBI to facilitate achieving minimum shareholding, various companies have not complied with the same. As a result SEBI has taken stern actions like freezing of voting rights, delisting of securities, exclusion of scrips from F&O segments etc.

SEBI has once again vide circular dated October 10, 2017[1], in order to bring uniformity of approach in enforcement of MPS norms and to ensure compliance with same, laid down following procedure:

Steps to be taken by RSE on observing non-compliance

  1. Fine of ₹5,000 per day (₹10,000 per day if non compliance continues for more than 1 year) of non-compliance on the listed entity till the date of compliance. In case the listed entity fails to pay the fine despite receipt of the notice as stated above, the recognized stock exchange may initiate appropriate action.
  2. Freezing of shareholding of promoter/promoter group till the date of compliance (this shall not be an impediment for the entities complying with MPS norms through the methods specified/approved by SEBI).

Provided that where it is observed that the listed entity has adopted a method for complying with MPS requirements which is not prescribed by SEBI under clauses (2)(i) to (vi) under SEBI circular[1] dated November 30, 2015 and approval for the same has not been obtained from SEBI under clause 2 (vii) of the said circular, the recognized stock exchanges shall refer such cases to SEBI.

  1. Promoters, promoter group and directors shall not hold any new position as director in any other listed entity till the date of compliance by such entity (listed entity shall give intimation of the same to RSE and promoters, promoter group and directors)
  2. RSE may consider compulsorily delisting of non-complaint entity in accordance with SCRA, 1956, Rules, 1957 and SEBI (Delisting of Equity Shares) Regulations, 2009.
  3. RSE may keep in abeyance the action or withdraw the action in specific cases where specific exemption from compliance with MPS requirements under the Listing Regulations/ moratorium on enforcement proceedings has been provided under any Act, Court/Tribunal Orders etc.

Upon intimation of compliance and on being satisfied, RSE shall remove the aforementioned restriction levied on the listed entities, its promoter, promoter group and directors.

Aforementioned actions taken by SEBI are without prejudice to its power to take action under the securities laws for violation of the MPS requirements.

International practice

Colombo Stock Exchange

Pursuant to rule 7.13 of the listing rules[2] of the Colombo Stock Exchange, every company listed on the main Board shall maintain a minimum public shareholding as stipulated therein. Previously, such listed companies were required to comply with this requirement of minimum public shareholding by December 31, 2016. However, likewise SEBI, Stock Exchange Commission in consultation with Colambo Sock Exchange has extended the timeline to June 30, 2017 for the listed companies not complying with the requirement of minimum public shareholding.[3]

Europeon Union (Euronext)

Pursuant to the regulations of Euronext Amsterdam[4], minimum public shareholding maintained by the companies shall be 25% of the issued shares of the company. Unlike, SEBI, Colambo Stock Exchange, Euronext considers the free float/liquidity available for the security of the company.  In case a large number of shares of the company are available to public, ensuring enough liquidity for the such shares, irrespective of the percentage, minimum public shareholding may go below 25% subject to the condition that minimum public shareholding shall never be lower than 5% and the free float shall always represent at least EUR 5 million (based on the offering price).








SEBI aborts brightening of fine lines of control

By CS Vinita Nair, (

SEBI at its Board meeting held on March 12, 2016[1] discussed and decided on several important matters, one of them being approving for initiation of public consultation process regarding Bright line Tests for Acquisition of ‘Control’ under the SEBI (SAST) Regulations, 2011[2] (SAST). Acquisition of control, in case of listed entities, entails making an open offer under SAST.

Control has been defined, by way of an inclusive definition, under various laws in India and internationally. The crux of the definition of ‘control’ under various laws has been discussed in Annexure 1. Primarily, the salient features of definition of ‘control’ are as under:

  • The right to appoint a majority of directors
  • The right to control the management
  • The right to control the policy decision

Such rights may be exercised by a person, directly or indirectly. The rights may accrue by virtue of shareholding, management rights, shareholder agreements, voting agreements or in any other manner. However, in case of contractual agreements, assessment of acquisition of control becomes complex and requires consideration of facts. It has been represented to SEBI to amend the definition of control, thereby shifting it from a principle based definition to rule based definition, in order to avoid multitude of opinions. In a given scenario multiple regulators may all be applying the test of control from different perspectives and arriving at differing results which may lead to ambiguity and confusion in the market

In view of the same, SEBI, in the Discussion paper, had proposed following two options to identify bright lines for control:

Option 1:- Framework for Protective Rights

Option 2:- Adopting a numerical threshold

The definition of ‘control’ under the SAST may be amended such that control is defined as:

(a) the right or entitlement to exercise at least 25% of voting rights of a company irrespective of whether such holdings gives de facto control; and/or

(b) the right to appoint majority of the non-independent directors of a company.”

This article analyses the proposed definition of control in the light of past judgments, committee reports etc. The Discussion paper was put open for public comments till April 14, 2016.


‘Control’ as explained in case of Subhkam Ventures v/s SEBI

Decision of Securities Appellate Tribunal (SAT) in case of M/s Subhkam Ventures (I) Private Limited versus SEBI[3] . The recital of the agreement entered into with MSK Projects (India) Limited and its promoters, provided that Subhkam is only a financial investor and will neither be regarded as the promoter nor acquire control and management of the target company for any reason. Subhkam argued that open offer was made under Regulation 10[4] of SAST, 1997 while SEBI insisted that control was acquired and therefore Regulation 12[5] was also required to be disclosed to enable shareholders to make an informed decision.

SAT explained the difference in case of proactive and reactive power and clarified that control, means creating or controlling a situation by taking the initiative and not reacting. It is a positive power and not a negative power. In case of Subhkam, the intent behind incorporating protective clauses in the shareholder’s agreement was to ensure that the target company does not undergo any paradigm shift from its present position without Subhkam’s knowledge and approval. Such provisions did not grant control but enabled Subhkam to oppose a proposal, provided fetters to protect the investment made. SAT allowed the appeal by inferring that none of the clauses of the agreement, individually or collectively demonstrates control in the hands of the appellant.

Being a key issue, SEBI appealed the SAT order before Supreme Court. Supreme Court, on November 16, 2011 stated that ‘keeping in view the above changed circumstances, it is in the interest of justice to dispose of the present appeal by keeping the question of law open and it is also clarified that the  impugned order passed by the SAT will not be treated as a precedent.

Deliberations on ‘Control’ in TRAC[6] report

The Committee concluded that a holding level of 25% of voting rights permits the exercise de facto control (Para 2.6). The existence or nonexistence of control over a listed company would be a question of fact, or at best a mixed question of fact and law, to be answered on a case to case basis. Any blanket provision whereby a right to say “no” is in all circumstances deemed to either constitute “control” or not to constitute “control” may be liable to misuse (Para 3.3). Acquisition of de facto control, and not just de jure control should expressly trigger an open offer (Para 3.6). The Committee had recommended the definition of “control” be modified to include “ability” in addition to “right” to appoint majority of the directors or to control the management or policy decisions would constitute control. It further clarified that a director or officer of the target company would not be regarded as being in control merely by virtue of holding such position (Para 3.7).

The Committee examined the possibility of introducing a whitewash provision in the Takeover Regulations on the lines of international practice i.e. an open offer would not be required if a material majority of the shareholders of the target company were to pass a resolution waiving the open offer. The rationale for such a framework is that an open offer is ultimately made for the benefit of the shareholders and it is well within the shareholders‘ rights to renounce such a benefit if they so desire (Para 12.17). However, the whitewash provisions were not incorporated in SAST, 2011 in the absence of robust regulations on proxy solicitation, and given the realities of the Indian market, any provision for shareholder waiver for an open offer may not be in the best interests of investors at large.

Veto rights – protective rights not amounting to exercise of ‘control’

As was explained under SAT order in case of Subhkam Ventures v/s SEBI, veto rights are protective in nature rather than participative in nature. Veto rights are fetters for the purpose of good governance and aimed to protect the investments made from the whims and fancies of the promoters who manage the company. On similar lines, an illustrative list of protective rights has been provided which may be granted to an investor subject to following conditions is provided by way of Annexure 2:

  • The investor must invest atleast 10% or more in the target company;
  • Approval by way of majority of minority i.e. approval of public shareholder’s needs to be obtained and such rights needs to be incorporated in Articles of Association.
  • In case of IPO, the existing agreements to stand cancelled/ modified or suspended till approval is obtained in the aforesaid manner post listing of shares.

However, there still remains a likelihood of this leading to further complexities in assessment of control owing to ambiguity in interpretation.

Adopting numerical threshold

In view of the provisions relating to passing of special resolutions under Companies Act, 2013 and trigger limit for determining control under SAST being 25%, it was proposed to regard 25% as the threshold level for trigger of control in Indian listed companies. Further, it was proposed to determine control on the basis of right to appoint non-independent directors and not majority of directors. The reason for the same being Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribes the composition of Board.

As compared to aforesaid option, this approach would reduce the uncertainty in assessment of acquisition of ‘control’, however, will not be able to capture control derived by way of special rights.

Stakeholders’ Comments and opinions

SEBI vide a Press Release dated September 08, 2017[7] informed that a number of comments from various stakeholders including industry bodies, intermediaries, advocates and investors were received on the Discussion paper issued on March 14, 2016. No particular option garnered overwhelming support amongst the stakeholders. SEBI also received the views of the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India in this regard.

Few stakeholders including the MCA opined that changing the current definition of ‘control’ may reduce the regulatory scope and may be prone to abuse and hence, the current definition of ‘control’ may not be changed. Instead the stakeholders opined that it would be more appropriate to take decisions on a case-to-case basis. Further, it may be noted that the Justice Bhagwati Committee which was constituted in the year 1995 to review the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994, had recommended a broad definition of control and opined that it should be left to SEBI to decide whether there has been an acquisition of control on the basis of facts of each case.


SEBI intended to align the definition of control, in line with the recommendations and deliberations made in report submitted by TRAC, justification given in the aforesaid SAT order. However, pursuant to the comments and opinions received from the various stakeholders and authorities it is felt that any change or dilution in the definition of control would have far reaching consequences since a similar definition of ‘control’ is used in the Companies Act, 2013 and other laws.  Consequently, it has been decided to not to proceed with the amendment and to continue with the practice of ascertaining acquisition of ‘control’ as per the extant definition in the SAST.

Annexure 1

Sr. no Act/ Regulations Parameter for determining control Exclusions, if any
1. SEBI (SAST) Regulations, 2011 ·         right to appoint majority of the directors or to

·         control the management or policy decisions


exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

·         Mere holding of position of a director or officer in the target company.
2. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 As defined under SAST  
3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 As defined under SAST, 1997 (same as above) ·         Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management:

Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3.

4. Companies Act, 2013 Similar to definition under SAST. Exclusions not included.
5. Consolidated FDI Policy, 2015 & FEM ( Transfer or issue of security by a person resident outside India) Regulations, 2000 Similar to definition under SAST. Exclusions not included.
6. Competition Act, 2002 ·     controlling the affairs or management by—

o   one or more enterprises, either jointly or singly, over another enterprise or group[8];

o   one or more groups, either jointly or singly, over another group or enterprise;

7. AS-18 ·     (a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or

·     (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or

·     (c) a substantial interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the enterprise

8. Ind AS-27 ·     power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.  
9. IFRS 10 ·     Ownership of more than half the voting right of another entity  Power over more than half of the voting rights by agreement with investors

·     Power to govern the financial and operating policies of the other entity under statute/ agreement

·     Power to remove/appoint majority of directors

·     Power to cast majority of votes.

10. City Code on Takeovers and Mergers, UK ·     Control means an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights (as defined below) of a company, irrespective of whether such interest or interests give de facto control.  
11. Takeover Guide, Canada ·     A “control person” is a person (or person within a combination of persons who are acting in concert) which holds a sufficient number of shares to affect materially the control of the target (and, if the ownership is greater than 20%, the person(s) are deemed, in the absence of evidence to the contrary, to hold a sufficient number of shares to affect materially the control).  
12. The Singapore Code on Takeovers and Mergers ·     Effective control means a holding, or aggregate holdings, of shares carrying 30% or more of the voting rights (as defined below) of a company, irrespective of whether that holding (or holdings) gives de facto control. “Acquiring effective control” of a company refers to a situation where a person and parties acting in concert with him, who previously held in aggregate less than 30% of the company’s voting rights, increase their aggregate holding of voting rights in the company to 30% or more.

·     “Consolidating effective control” in a company refers to a situation where a person and parties acting in concert with him, who already owned between 30% and 50% of the company’s voting rights, increase their aggregate holding of voting rights in the company by more than 1% within a 6 month period.

13. Malaysian Code on Takeovers and Mergers 2010 ·     Does not define control


14. Takeover Guide, Japan ·     Does not define control  


Annexure 2

Illustrative list of protective rights that do not amount to exercise of “control”, including quorum[9] rights for meetings involving matters stated below:

  • Appointment of Non executive Chairman/ Vice Chairman without any casting vote;
  • Appointment of investor’s nominee as observer of Board, without any voting or participation rights;
  • Covenants stipulated by banks, NBFCs etc granting loan on commercial basis, provided the rights are customary to the lending business
  • Non exclusive and Mutually beneficial commercial agreements, approved by the Board where the Board of target company has the right to terminate the agreement;
  • Veto rights in case of following matters that are not part of the ordinary course of business[10] or involve governance issues would be regarded as protective rights.
    • Amendment of MoA & AoA adversely impacting the investor’s rights;
    • Alteration to the capital structure of the company;
    • Change of statutory auditors;
    • Material[11] divestment, transfer or disposal of an undertaking or material subsidiary of the target company;
    • RPTs entered not in ordinary course of business or not on an arm’s length basis;
    • Material[12] acquisition of any companies, bodies corporate, business, undertaking or joint ventures;
    • Incurring indebtedness, granting loans, providing guarantees or creating security in excess of thresholds prescribed under Act, 2013 without shareholder approval;
    • winding up of the company or making a general assignment for the benefit of the creditors of the company and/or the subsidiaries or admitting in writing the inability of the company to repay its debts when they become due;
    • write-off of any of the receivables, loans and advances, investment or investments or inventories outside the ordinary course of business[13]




[4] Acquisition of fifteen per cent or more of the shares or voting rights of any company.

[5] Acquisition of control over a company.

[6] Takeover Regulations Advisory Committee – set up under the chairmanship of Mr. C Achuthan. Report was submitted on July 19, 2010  –


[8] “group” means two or more enterprises which, directly or indirectly, are  in a position to —

(i) exercise twenty-six per cent or more of the voting rights in the other enterprise; or

(ii) appoint more than fifty per cent of the members of the board of directors in the other enterprise; or

(iii) control the management or affairs of the other enterprise;

[9] If two meetings are not quorate, the next meeting would be deemed to have quorum despite the absence of the investor nominees.

[10] The company will be required to formulate a policy defining the parameters that will be ‘outside the ordinary course of business’.

[11] The company will be required to formulate a policy defining the parameters that will be ‘material’.

[12] The company will be required to formulate a policy defining the parameters that will be ‘material’.

[13] The company will be required to formulate a policy defining the parameters that will be ‘outside the ordinary course of business’

SEBI requires disclosure by banks in case of NPA divergence

By Mayank Agarwal, (

The banking sector is one of the pillars for economic development of any country, and any well balanced and healthy economy is largely dependent on a transparent and credible banking system. In recent years, the Indian economy has recognized the importance of a well-regulated and fundamentally strong banking framework and made it one of its priorities to clear out the vast amount of unhealthy practices and activities that tread on the fine line of regulation. A slew of new policies which led to clearer recognition norms, stricter disclosure requirements, more hands-on approach by the Reserve Bank of India (RBI) and an overall environment that is much more transparent than before are all testimony to the fact that the banking institutions are in for a major overhaul. The introduction of practices such as Asset Quality Review (AQR), restructuring norms and the introduction of Insolvency and Bankruptcy Code (IBC) by the RBI were steps aimed towards a fundamentally cleaner banking system. Read more

Taming UPSI and tampering disclosure requirements

By CS Vinita Nair,

It is a fact that certain decisions are taken by Board impromptu/ surprise item and is not a part of the agenda. Therefore, the agenda includes an item ‘With the permission of Chairperson’ to keep the agenda flexible. It is a good thought to ponder upon that whether all tabled items are impromptu in true sense? Can companies put Unpublished Price Sensitive Information (UPSI) as tabled items and cut the prior intimation requirements? Read more

SEBI mandates timely disclosure of ‘default’: intends to fill credit information gaps

By Vallari Dubey, (

The Securities and Exchange Board of India (‘SEBI’) has vide circular dated 4th August, 2017[1], issued a set of additional disclosures for default in payment of interest/repayment of principal amount on loans from banks/financial institutions, debt securities etc. the same are to be complied with by all listed entities,

The circular is issued by SEBI, by virtue of ‘the power to remove difficulties’ granted under Regulation 101 of Chapter XII of LODR Regulations, 2015. This circular shall take effect from 1st October, 2017.


As per the existing disclosure requirements, a listed entity is required to intimate or bring it into records of public and/or the stock exchange, the details of any material event or action as specified in the regulations.

Existing disclosures in case of ‘default’

Disclosures by entities which has listed its specified securities[2]

Regulation 30 deals with disclosure of any events/information which, in the opinion of the board of directors of the listed entity are considered material.

The events specified in Para A, Part A of Schedule III are deemed material events, and the listed entity is required to disclose the same to the stock exchange as soon as reasonably possible and not later than twenty four hours from the date of occurrence of event/information. Further, the listed entity shall make disclosures updating material developments with respect to the disclosures already made. The disclosures are also required to be hosted on the website of the company for a minimum period of 5 years.

Inter-alia the events mentioned, para 6 reads as:

  1. Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.

It may be noted that the term ‘default’ is not defined for the purpose of disclosure under this para.

Disclosures by listed entities which has listed its non-convertible debt securities or non-convertible redeemable preference shares or both

Regulation 51 deals with disclosure of information having a bearing on the performance/operation of the listed entity and/or price sensitive information.  Sub-regulation (2) refers to Part B Schedule III and the events specified therein shall be promptly disclosed to the stock exchanges.

Inter-alia the events mentioned, para 1, 4, 9 and 11 read as:-

  1. Expected default in timely payment of interests/preference dividend or redemption or repayment amount or both in respect of the non-convertible debt securities and non-convertible redeemable preference shares and also default in creation of security for debentures as soon as the same becomes apparent;


  1. Any action that shall affect adversely payment of interest on non-convertible debt securities or payment of dividend on non-convertible redeemable preference shares including default by issuer to pay interest on non-convertible debt securities or redemption amount and failure to create a charge on the assets;


  1. Delay/ default in payment of interest or dividend / principal amount/redemption for a period of more than three months from the due date;


  1. Any instance(s) of default/delay in timely repayment of interests or principal obligations or both in respect of the debt securities including, any proposal for re scheduling or postponement of the repayment programmes of the dues/debts of the listed entity with any investor(s)/lender(s).


Explanation – For the purpose of this sub-para, ‘default’ shall mean Non-payment of interest or principal amount in full on the pre-agreed date and shall be recognized at the first instance of delay in servicing of any interest or principal on debt.

Additional disclosures to be made w.e.f. 1st October, 2017

Pursuant to the said circular, disclosures in the format prescribed therein (not covered under the existing disclosure regime) are required to be made. As stated in the circular, the disclosures seek to imbibe a culture of discipline amongst the listed entities and facilitate to fill the existing gaps in terms of credit and default information of listed entities, in respect of loans and borrowings from banks. Such detailed information which is to be provided, along with strict timelines, will prove to be fruitful to the banks and other stakeholders, in cases where any application is initiated against any listed entity before the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016.The disclosures shall be made when the listed entity has committed “default” in its obligation towards any of the following:-

  1. Debt securities (including commercial papers)
  2. Medium Term Notes (MTNs)
  3. Foreign Currency Convertible Bonds
  4. Loans from banks and financial institutions
  5. External Commercial Borrowings (ECBs)
  6. Any other case as and when required

For the purpose of the aforesaid, default shall mean non-payment of interest or principal amount at a pre-agreed date.

Information to Credit Rating Agencies (CRAs)

All information pertaining to ‘default’ by the listed entities shall also be supplied to Credit Rating Agencies. Reference may be made to the recent SEBI circular dated 30th June, 2017[3]. The circular clarifies the applicability of the obligation on the Debenture Trustee to monitor and share information about default in payment of interest/principal amount, with registered CRAs. Another circular on the same date was issued[4], laying down a comprehensive monitoring and review mechanism for ratings given by CRAs; the circular also provide for submission of No Default Statement by the issuer to the CRA on a monthly basis.

A tabular comparison of disclosures before and after October 1, 2017

An effective date of 1st October, 2017 has been provided in the circular to enable enough flexibility to the listed entities, to set up proper systems in place for compliance of the disclosures to be made therein.


[2] Regulation 2 (zl) defines: ‘specified securities’ means ‘equity shares’ and ‘convertible securities’ as defined under clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;




Concurrence of Pledgee Sufficient For Creating Pledge


The Securities and Exchange Board of India (SEBI) vide its notification dated July 25th, 2017[1] has come up with SEBI (Depositories and Participants) (Second Amendment) Regulations, 2017 (hereinafter referred to as “DP Second Amendment Regulations, 2017”) substituting sub-regulation (3) of regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996[2] (hereinafter referred to as “DP Regulations, 1996). Read more