Digi to dizzy highs: Digital gold shines in regulatory dark spot

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– Vinod Kothari & Dayita Kanodia | finserv@vinodkothari.com

An industry report on a digital gold seller website estimates the FY 25 digital gold volume of 25 tons, which is a whopping Rs 30 lakh crores. While that number may be mind-boggling and may be inclusive of other forms of electronic gold (gold ETFs for example), there is no doubt that digital gold, sold on platforms from Paytm to Google Pay, to a wide variety of electronic platforms, has attracted the fancy of crores of investors. Turnover reported on the financials of some of the digital gold sellers[1] is almost 90% in FY 24-25. Looking at these volumes, one may ask – What exactly are the consumers actually buying and who is accountable for all these investments if anything goes wrong?

In this article the author discusses the current regulatory void in which digital gold is surging, and why it is so surprising that SEBI has acquired powers to regulate commodity exchanges, while a regulated digital gold scheme called Electronic Gold Receipts (EGRs) has already been launched under the aegis of that regulatory power.

The golden shine

The love that Indians have for gold doesn’t need elaboration; India is the world’s largest household gold holding country. The Morgan Stanley report that the stock of gold with Indian households may be Rs 336 lakh crores was cited all over. At the same time, the prices of gold have continued to surge.

With gold becoming increasingly unaffordable for a large section of the Indian population, many have turned to digital gold, a concept that allows individuals to invest with amounts as low as ₹100 and own a fraction of the “gold commodity.”

The three major platforms offering digital gold let you buy gold with Re 1, Rs 10 and Rs 100 – whatever infinitesimals fractions of the virtual yellow metal that you want to buy, and these sales have reached dizzy heights. One such digital gold seller reported a FY 24-25 sale of Rs 66230 crores, registering an increase of 89% over the previous year.

Current Regulatory Vacuum: 

The typical search for law about any new instrument would be – which of the existing laws cover a new-age instrument called digital gold? It would be counter-intuitive to expect that laws would always house the provisions for transactions that evolve in a dynamic world. Laws evolve much slower than situations, transactions, dealings, interests or the way people perceive or deal in value or wealth.

However, some of the potential laws would be – is it a “security” under the Securities Contracts Regulation Act? Is it a “deposit” being a financial transaction, and may come under the bar of the Banning of Unregulated Deposit Schemes Act? Given the fact that digital gold is backed, at least supposedly, by a physical gold, is it similar to trading in warehousing receipts under the Warehousing Development and Regulation Act? And so on.

The easiest to dismiss will be the Warehousing law, which was obviously intended for warehouse keeping and transferability of warehousing receipts. It was mostly intended for agricultural commodities. Some metals have also been notified by the WDRA, but gold is not one of them, and for very understandable reasons.

The content about transactions in digital gold being deposit transactions also seems easy to dismiss, at least theoretically, as the intent of a digital gold seller is not to receive money with a promise to return it. In fact, there is nothing to return, as the money has been exchanged for a right over an infinitesimal portion of gold. The digital gold seller makes a purported sale; a sale is not a deposit. The one who sells digital gold is actually selling the gold backing it. But that itself may be fallacy, because a sale requires appropriation and ascertainment of the goods, and given that the transactions in digital gold are for sizes as small as Rs 100, it is unlikely that physical gold of as much quantum would have been separated. So, if it is not appropriation or segregation of the underlying goods, then it may very well be construed as a receipt of money without the transfer of goods, and hence, deposit regulations may be brought in.

Clearly, digital gold is being traded as an investment product, and not as a device to actually take take or give delivery of the gold. Therefore, instinctively, the focus should be on the Securities Contracts (Regulation) Act (SCRA). It is bought and sold in fixed denominations of money; therefore, it also has the optical similarity with a typical financial instrument. If one sees the definition of “securities” under the SCRA, it is an inclusive definition – meaning thereby that the law does not define what a security is, but lists out what securities are covered by the law. Two points – that list itself has continued to expand over time, either because of statutory enlistment of new items, or because of the power granted to Central Govt under sec. 2 (1) (h) (iia).

In 2015, powers to regulate commodity exchanges and commodity derivative transactions were conferred on SEBI, by amending the SCRA. SEBI itself has framed a scheme for Electronic Gold Receipts, discussed below. Hence, dealing with digital gold is not alien to SEBI’s domain. In any case, the Central Govt has the power to notify digital gold as a security.

On 8th Nov., 2025, SEBI issued a press release, less than even the old text form statutory warning cigarette packets, saying that digital gold is unregulated, and investors need to be aware that investor protection mechanisms under securities market purview shall not be available for such digital gold investments. However, what is the reason for the regulators waiting and watching a ballooning market, without a definitive regulatory clarity?

This unregulated nature of digital gold was also highlighted in the case of Nishchay Babu Arkalgud vs Jar Gold Retail Private Limited, wherein the Karnataka High Court observed:

The evolution of digital gold, as a commercial concept, is not in dispute. However, the materials on record disclose that serious allegations are surfaced, including assertions that physical gold could not be traced when demanded, notwithstanding the assurances to the contrary.

Further, several customer complaints about dealings by the digital gold platform were noted as a part of the judgment, such as:

“This app has absolutely no credibility, you keep getting prompts that you’ve saved enough money to buy a gold coin, but every time just before placing order for gold coin, you get a message that gold coin is not deliverable. Also you can’t withdraw the amount you’ve saved, it only allows to withdrawal almost half of the amount. I mean, what even is the point of this application, why wouldn’t anyone just use a savings account? Lost case.”

Such comments are largely because of the unregulated nature of the product.

SEBI imposed ban for stock brokers

Earlier, digital gold was offered not only through digital payment applications but also by stock brokers registered with SEBI. However, under Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), members of a stock exchange are prohibited from engaging in any business other than that of securities or commodity derivatives, except as a broker or agent, and only if such activity does not involve any personal financial liability.

SEBI observed that certain stock brokers were facilitating the buying and selling of digital gold for their clients, an instrument that does not qualify as a ‘security’ under the Securities Contracts (Regulation) Act, 1956 (SCRA). Consequently, through a letter dated August 3, 2021, SEBI informed stock exchanges that such activity violated Rule 8(3)(f) of the SCRR and directed members to refrain from undertaking it.

Pursuant to SEBI’s communication, the NSE issued a circular dated August 10, 2021, instructing its members to discontinue the offering of digital gold and ensure strict compliance with applicable regulations. Members who were engaged in such activities were granted one month to cease facilitating the buying and selling of digital gold on their platforms.

No for stock brokers, but no holds-barred for electronic platforms

SEBI barring its regulated securities intermediaries from dealing in or advising on digital gold did not stop the whole range of other popular public places having millions of hit every day – the e-commerce platforms, payment gateways, wallets or online payment devices. Almost all of them are aligned to some or the other digital gold seller, and permit both buying and selling of digital on or through their platforms.

RBI, has till now maintained silence on such activities, and therefore, several NBFCs have been offering digital gold on their platforms.

The rule is simple – wherever there is a footfall, there is an opportunity to make money by selling digital gold.

In a regulatory blackhole, investors continue to flock to a market where there is least oversight. There is supposedly a deposit of gold, a custodian and trustee mechanism, but nowhere do any of the rules require these custodians or the trustees to be regulated, which, in fact, they are not. In short, even if the existing major players abide by some unwritten self-assumed rules of fair game, there is no entry barrier in the business, nor are there any mechanics of clearing or settlement of trades done on the multitudes of platforms which are now freely selling such digital gold. The scenario, if the past history of unregulated instruments is any indication, is the perfect recipe for an implosion.

As a key principle, wherever someone markets an investment-based product to the public, there is a fiduciary relationship. Which means there is someone on whom investors are putting their trust. Investors can put trustin an eco-system which has regulators, supervisors, capital requirements, mechanics to ensure that the digital paper at no point is less than the real metal behind.  If neither of these are there, how can each regulator keep looking sideways for the other regulator to rise to the occasion?

Creation of a Self-Regulatory Organisation for digital gold

On December 2, 2025, the India Bullion and Jewellers Association (IBJA) announced the establishment of a self-regulatory division for the digital gold industry. This may have been influenced by SEBI’s  warnings (referred above)  to  investors that digital gold products are neither regulated as securities nor as commodity derivatives, with SEBI feigning lack of jurisdiction. 

Among others, the self-regulatory framework has proposed rules on minimum purity,  physical backing, insurance, and segregation of the underlying bullion in addition to consumer Protection rules on clear communication of risks, fees, and a defined grievance redressal mechanism.

Further, IBJA will establish a Digital Gold Transparency Portal to publicly display anonymized, aggregated compliance data and summaries of audit findings.

The final self-regulatory framework is set to be published by March 31, 2026.

The key features of an SRO, essential for its credibility, as pointed out in RBI’s Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs), include the following: 

  • Authority & Governance: Power to set/enforce standards with strong, transparent governance.
  • Rule-making & Oversight: Clear, consultative rules and monitoring of members.
  • Conduct & Discipline: Defined codes with non-monetary penalties (e.g., reprimand, expulsion).
  • Compliance Focus: Promote adherence to Reserve Bank of India regulations.
  • Dispute Resolution: Standardized and transparent mechanisms.
  • Surveillance: Effective monitoring of members and sector.
  • Ecosystem Development: Promote best practices aligned with regulations.

. SROs are, of course, bodies consisting of the industry participants, but in order to be optically and substantively having the right to introduce code of conduct, these bodies need to have leadership that is sufficiently empowered to lay such code. It is the constitution and independence of the SRO that will render it credibility.

In any case, self regulation is not the alibi for lack of regulation – therefore, the author still strongly feels that the instrument has become far too retail-centric and far too popular for the regulators to keep shunning from action. 

Electronic Gold Receipts (EGRs)

While digital gold is currently in a state of regulatory blackhole,SEBI recognises EGRs, a scheme which was launched after a 2023 Budget announcement. Till 2024, SEBI was still  fine tuning the Master Circular, which was issued in June, 2024. This has elaborate mechanism for registered vault managers who store the physical gold against which EGRs are issued, complete with insurance, grievance redressal mechanisms, etc. All of this atypical of a regulated instrument. But given the competition EGRs face from their unleashed brother, EGRs are nowhere in the range of visibility, compared to digital gold.

Concluding Remarks

The volumes of digital gold keep rising while the instrument itself continues to stay in a state of regulatory dark spotwith some warning circulars issued by the SEBI such as the one on Nov 8. However, it lacks any regulatory clarity, any authority which can take accountability if anything goes wrong.

In this prevailing environment for digital gold, every player continues to revel and make money. The digital gold sellers are reporting PAT rises of over 200%; the GST department must be enjoying the 3% GST it charges on the trades, and each of the multiple platforms that facilitate the trades likewise make money. If gold is one of the metals that has least bid-ask spreads, then the question is – where is all this profit, for so many of the players, coming from?

[1] Some of the digital gold sellers are private companies, whose annual reports are not in public domain. Many of the numbers stated in the article are, therefore, based on the financials/other reports on the website of Augmont.

India FSAP 2025: Key Takeaways and Policy Recommendations

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– Chirag Agarwal, Assistant Manager | chirag@vinodkothari.com

A joint World Bank-IMF team visited India in 2024 to update the findings of the Financial Sector Assessment Program (FSAP), which took place in 2017. World Bank on October 30, 2025 released the report1 which summarises the main findings of the mission, identifies key financial development issues, and provides policy recommendations.

We were in touch with the FSA team for our recommendations on certain aspects. The FSA recommendation on leasing (discussed below) is based on our feedback.

This article discusses in brief the key takeaways from the FSA Report.

Key Takeaways:

  1. Stronger and More Diversified Financial System: As per the report, India’s financial system has become more resilient, inclusive, and diversified since the previous 2017 assessment. Non-bank financial institutions (NBFIs) and market financing (other than from banks) now account for 44% of total financial assets—up from 35% in 2017—reflecting deeper financial intermediation beyond banks.
  2. Reforms Critical for India’s 2047 Growth Vision: The report suggests that to achieve the target of a USD 30 trillion economy by 2047, India must modernize its financial architecture to channel both domestic and foreign savings into productive investment, deepen capital markets, and attract long-term infrastructure and green financing2.
  3. Macroprudential Tools: The assessment highlights rising systemic risks due to financial diversification and interlinkages. It recommends expanding data collection and deploying macroprudential tools—including introducing Debt Service to Income (DSTI) limits across banks and NBFCs and building counter-cyclical capital buffers (CCyBs) for banks to manage liquidity, intersectoral contagion, household credit risks, and climate-related financial risks
  4. Regulatory and Supervisory Enhancements: While India’s regulatory oversight framework for banks, insurers, and markets is broadly sound, lingering issues include state influence on regulators, limited powers over governance of state-owned entities, and gaps in conglomerate and climate-risk supervision. The report suggests that efforts should be made to ensure better coordination between regulators and extending the scope of the regulatory and supervisory frameworks.
  5. Banking and NBFC Reforms: The report stresses adoption of IFRS 9, enforcing Pillar 2 capital add-ons, and elimination of prudential exemptions for state-owned NBFCs. It also suggests considering additional liquidity requirements tailored to different business models.
  6. Tax  treatment of leasing: The report suggests that to diversify MSME finance the tax treatment of leasing should be reviewed to ensure an equal treatment between lease and debt transactions. At present, interest on loans is exempted under the GST laws and hence, there is no GST levied on the loan repayments, however, the entire rentals are subject to GST in case of financial leases.
  7. Transfer of oversight function of NHB to RBI: While regulation of HFCs moved to RBI in 2019, supervision still rests with NHB, which follows a limited, compliance-based approach. Shifting supervision to RBI would strengthen oversight and remove the conflict of interest since NHB also acts as promoter and refinancer for HFCs.
  8. MSME Finance: The report recommends integrating TReDs with the e-invoicing portal for automatic invoice uploads. It also suggests incentivizing large buyers and mandating state-owned enterprises to upload invoices to improve cash flow for MSMEs. Further, the report also mentions that SIDBI’s funding support to NBFCs, including NBFC factors, should be increased, along with developing credit enhancement and guarantee facilities for NBFC bonds and MSME loan securitizations.
  1. https://documents1.worldbank.org/curated/en/099103025110514063/pdf/BOSIB-606133f7-2e00-4696-9b41-57f3737d140d.pdf
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  2. See our resources on sustainable financing: https://vinodkothari.com/resources-on-sustainability-finance/  ↩︎

Exempting IFSCA-registered Finance Companies from section 186

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Ayush Kumar – Executive | corplaw@vinodkothari.com

Background:


With a view to promoting ease of doing business for Finance Companies (FCs) operating in the IFSC jurisdiction, the MCA, upon the request of the IFSCA, has vide its notification dated November 3, 2025, extended the exemptions available under section 186 of the Companies Act, 2013, to FCs registered with the IFSCA – similar to those already available to NBFCs registered with the RBI.


Exempted companies – existing exemption list 

Under the existing framework, the following companies were exempted from section 186 (except sub section (1)), if loan given, guarantee made, security in connection with loan given, investment in securities done was in the ordinary course of business of:

  • Banking company
  • Insurance company
  • Housing finance company
  • Registered NBFCs
    • which is in the business of giving loans or providing any guaranty or security for due repayment of any loan 
  • Company established with the object of and engaged in the business of providing infrastructural facilities

Finance Companies registered with IFSCA – added in the exemption list 

Finance Companies are defined under Rule 2(1)(e) of IFSCA (Finance Company) Regulations, 2021. 

  • FCs should be separately incorporated 
  • It is not a Banking Unit registered with IFSCA
  • It deals in permitted activities under Reg 5(1)
  • It cannot accept public deposit from residents / non-residents 

FCs engaged in the following permitted activities (Eligible FCs) are exempted from the applicability of sec 186:

The condition for availing the exemption remains the same as that for NBFCs and other companies i.e the loan / guarantee / security in connection with loan should be extended in the ordinary course of its business.

Related articles:

  1. IFSC Finance Company: Section 186 Compliance Not Required for Routine Financial Activities
  2. Two’s cute, three’s a crowd?
  3. Companies (Amendment) Act, 2017 brings relief under sections 185 and 186

Our resource centre on IFSCA – https://vinodkothari.com/resources-on-ifsca/

IFSC Finance Company: Section 186 Compliance Not Required for Routine Financial Activities

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– Clarification provided in line with exemptions available to NBFCs

– Payal Agarwal, Partner | payal@vinodkothari.com

Section 186 of the Companies Act, 2013 specifies compliance requirements to be followed by a company in granting of loans, making investments, providing guarantee or security to any person or body corporate. For entities engaged in such activities in its “ordinary course of its business”, exemptions are provided through sub-regulation (11) of section 186.

Clause (a) of section 186(11) provides exemption for:

to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

The use of the expression “business of financing industrial enterprises” is explained to include:

  • NBFC which is in the business of giving of any loan to a person or providing any guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business. [existing provision] 
  • Finance Companies registered with IFSCA engaged in eligible permissible activities in its ordinary course of business (read more on Finance Companies here). [inserted vide the Companies (Meetings of Board and its Powers) (Amendment) Rules, 2025 notified on 6th November, 2025 (date of publication in Official Gazette)]

This brief snapshot provides an overview of the amendment:

Our other resources on Section 186 include:

See our Resource Centre on IFSCA here – https://vinodkothari.com/resources-on-ifsca/

Disclosure of ESG ratings – automated or still needs manual disclosure?

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Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com

Background

Pursuant to the recommendations of the Expert Committee and as discussed in the SEBI Board meeting held on Sep 30, 2024 and outlined in SEBI Circular dated December 31, 2024, stock exchanges (‘SEs) were mandated to specify the process and timelines for system-driven disclosure (‘SDD’) for any new ratings or revision in ratings. Pursuant to this, NSE and BSE issued their respective circulars specifying the procedural requirements with respect to system-driven disclosures for the ratings (‘SDD Circulars’) on August 1, 2025.

The receipt and/ or change in ESG ratings is a disclosable event in terms of Regulation 30 of the Listing Regulations read with clause (3) of Sch. III.A.A thereof. Hence, a question arises on whether or not the same is also covered by the SDD Circulars, or whether a manual disclosure is still required on receipt/ change of ESG ratings.

What is an ESG rating?

ESG rating is defined under Reg 28B(1)(b) of SEBI (Credit Rating Agencies) Regulations, 1999. To put it simply, an ESG rating is essentially an opinion about (a) either an ‘issuer’ or (b) a security. The ESG ratings provide an opinion on the ESG profile or characteristics, and may either refer to the ESG risks faced by the entity or the impact it may have on the environment and the society, or both.

As per SEBI’s framework for ESG rating provider, an ESG rating provider (‘ERP’) uses either of the below-mentioned models:

  1. Subscriber-pays model – wherein ratings are solicited by the subscribers that may include banks, insurance companies, pension funds, or the rated entity itself. 
  2. Issuer-pays – wherein the ratings are solicited by the rated entity, in terms of a written contractual agreement between such entity and the rating provider.

Disclosure requirement under Reg 30 of Listing Regulations

Any receipt of rating or revision in existing ESG rating is a ‘deemed material event’ and covered under clause (3) of Sch. III.A.A of Listing Regulations. Since the event emanates from outside the listed entity, such event is required to be disclosed to the SEs within 24 hours of such receipt / information.

Here, the following needs to be noted w.r.t. the disclosure requirements under Reg 30:

  • Ratings received under both subscriber-pays and issuer-pays model (solicited as well as unsolicited) are required to be disclosed.
  • Both upward and downward revision in ratings is required to be informed.
  • Withdrawal of an existing rating is required to be disclosed
  • Re-affirmation of an existing rating is required to be disclosed as well.

Automation of ESG rating disclosure

The SDD Circulars referred above, are applicable to both credit ratings and ESG ratings. Pursuant to the same, the ERPs are required to report the ESG ratings provided by them to the SEs. The manner of reporting by ERPs has also been provided in the SDD Circular itself. Once reported to the SEs, the ESG rating shall be automatically reflected on the website of the BSE and NSE.

Therefore, since SEs will get the ratings from the ERPs itself, both solicited and unsolicited ratings will be disclosed on the SE platform.

When does this SDD come into effect?

In terms of SDD Circulars, the disclosure of credit and ESG rating has become effective from August 2, 2025.

Actionable for the LEs?

Since the ESG rating shall be consumed by the SEs from the ERPs and auto disseminated on the website, there is no actionable for the LEs in relation to the disclosure of ESG rating under reg 30. However, LEs should monitor whether the ratings provided to them are reflected on SEs. In case any rating is not reported by the ERP, the LE may proactively disclose the same at its end.

Refer our resources below:

When “Profit” Isn’t Always Distributable

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– Understanding Reportable vs Distributable Profits under Ind AS and the Companies Act, 2013

– Sourish Kundu | corplaw@vinodkothari.com

In the sphere of corporate law intertwined with accounting principles, there arises a question on profits that are reported in the financials of a company and the amount that can actually be distributed, that is to say, a company’s reported profits may be impacted by several accounting standards, yet that does not mean it can distribute all of that profit as dividends. Under Indian law and accounting rules, there is a clear distinction between reportable profits (what appears in the financial statements) and distributable profits (what a company is legally permitted to pay out to shareholders). In this article, we decode the difference between reportable profits and distributable profits and the implications of this difference, whether companies are expected to prepare two statements of profit or loss, how investors are expected to read the financials to ascertain what can be expected as dividend. 

What are Reportable Profits?

“Reportable profits” refers to the profits (or loss) shown in the Statement of Profit & Loss prepared under Indian Accounting Standards (Ind AS). It includes all recognised items of income, expenses, gains and losses, whether realised or unrealised, so long as they meet the recognition and measurement rules in terms of the relevant accounting standards. For example, under Ind AS 109 (Financial Instruments), paragraph 5.7.1 states that changes in fair value of financial assets or liabilities measured at fair value through profit or loss (FVTPL) must be recognised in the PnL. Similarly, fair-value measurement principles under Ind AS 113 (Fair Value Measurement) apply where other Ind ASs require or permit fair value. 

Because reportable profits include unrealised fair value gains, remeasurements, or other accounting adjustments, there is always a possibility of an inflated or deflated picture being painted wherein there is a difference between a company’s “profit” number from the perspective of distribution.

What are Distributable Profits?

“Distributable profits” are that portion of profits (or reserves) out of which a company can legally declare and pay dividends to its shareholders under the Companies Act, 2013. Section 123(1) of the Act states that a company shall not declare or pay any dividend for a financial year except:

  • out of the profits of the company for that year, after providing for depreciation, and
  • out of the profits of any previous financial years, after providing for depreciation and remaining undistributed.

The first proviso to section 123(1) further clarifies that unrealised gains, notional gains or revaluation surplus arising from measurement at fair value shall not be treated as realised profits for the purpose of dividend declaration. 

“Provided that in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded”

Thus, even though accounting standards allow recognition of such gains/losses in the PnL statement, the law restricts their distribution and ensures distribution can be made of only actual realised profits.

As per the section, following adjustments are required to be made to reportable profits to compute distributable profits

Reportable ProfitsXXX
Less:
(b) unrealised gains(XXX)
(c) notional gains(XXX)
(d) revaluation of assets (positive)(XXX)
(e) any change in carrying amount of assets (positive) on measurement at FV(XXX)
(f) any change in carrying amount of liability (reduction) on measurement at FV
Add:
(a) revaluation of assets (negative)XXX
(b) any change in carrying amount of assets (reduction) on measurement at FVXXX
(c) any change in carrying amount of liability (increment) on measurement at FVXXX
Distributable ProfitsXXX

So effectively, it is not the case that companies need to maintain or prepare parallel PnL, one for the accounting purpose and one for the purpose of ascertaining distributable profits, the adjustments as illustrated above needs to be carried out. This is similar to adjustments carried out for the purpose of ascertaining profits in terms of Section 198 of the Companies Act, 2013, which is broadly used for determining CSR expenditure and the limits of managerial remuneration. Interestingly, the treatment of fair value changes in assets and liabilities is akin to how it is treated here, that is, fair value gains are not given credit and hence reversed, and on the other hand, fair value losses are not deducted and hence added back to arrive at the figure out of which managerial remuneration is to be paid, or CSR expenditure is required to be made. 

Some examples of such fair value changes and their impact on the reportable and distributable profit figures are given below: 

Examples: 

Consider the following scenarios for company following Ind AS principles of accounting: 

  1. Treatment of FVTPL
DateParticularsValue Reportable Profits Distributable Profits 
July, 2024Acquisition of investment Rs. 100––
31st March, 2025Value of investments Rs. 15050 (represents fair value gains routed through PnL)–
January, 2026Sale of investments Rs. 200–100 (realised gain)
  1. Deferred Tax Asset
DateParticularsValue Reportable Profits Distributable Profits 
July, 2024Acquisition of investment Rs. 100––
31st March, 2025Value of investments Rs. 70-30 (represents fair value loss routed through PnL)–
Deferred tax assetRs. 9 (30% tax on Rs. 30)9 –
January, 2026Sale of investments Rs. 90–-10

Why the Difference Exists

The divergence arises because accounting standards and company-law provisions serve different purposes:

  • The Ind AS framework aims to present true and fair information about an entity’s financial performance and position, which includes remeasurements and accounting for fair value changes.
  • The company law legislation aims to protect the company’s capital base and ensure dividends are paid out of “real” profits, thereby protecting creditor interests and preventing erosion of capital.

Thus, distributing unrealised or notional gains could expose the company (and its creditors) to risk if those gains reversed. The legal restriction is a form of capital maintenance concept.

Conclusion

In sum: reportable profits (what Ind AS shows) is not always the same as distributable profits (what a company can legally pay out). The presence of items such as unrealised fair-value gains, which are recognised in profit but not “realised” and hence, not available for distribution under company law, creates this difference. Understanding this distinction is essential because in the end, the dividend cheque flows only from the legally distributable pool and not simply from what the profit and loss account might suggest.

Read more:

Should you expect adjustment in profits for “Expected Credit Loss”?

Cash in Hand, But Still a Loss? 

Redeemable preference shares not debt under IBC

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– SC reinforces the distinction between ‘debt’ and ‘share capital’ for the purpose of IBC

– Sourish Kundu | resolution@vinodkothari.com

Introduction

The Supreme Court in a recent judgement in the matter of EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited, has categorically clarified that holders of Cumulative Redeemable Preference Shares (“CRPS”) are classified as investors rather than creditors (more specifically, financial creditors) and are therefore not entitled to file for insolvency under Section 7 of the IBC, since non-redemption of these shares do not qualify as a “default” under the Code.

In an article titled “Failed Redemption of Preference Shares: Whether a Contractual Debt?”, written way back in May, 2021, in the context of SC judgment in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Ventures Limited) & Ors, we  concluded, on the basis of the provisions of section 55 of the Companies Act, 2013 (“Act”) and related judicial precedents around the meaning of “debt”, that there can be no debt associated with a preference share and, where there is no ‘debt’, there is no question of it being a ‘financial debt’.

The findings of the SC in EPC Constructions judgement resonate with our views as explained in the article. However, we delve deeper into the aspect with analysis of the ruling as below, as to on what basis it was concluded that preference shares cannot be considered as ‘debt.

Brief facts of the case

The appellant entered into a contract for construction of a fertilizer complex with  the respondent, pursuant to which certain amounts  became due and payable by the respondent to the appellant, The receivables under the contract was converted into NCRPS, and such conversion was duly approved by the respective boards. Eventually, in course of certain events, the appellant filed a Section 7 petition against the respondent, on account of failure to pay the redemption amount on account of maturity of CRPS. The application was dismissed by NCLT, and then NCLAT on grounds that the CRPS cannot be termed as debt. The application then came for appeal before SC.

Below is a discussion highlighting the rationale for which dues pertaining to preference shares were not held to be financial debt.

Actions speak about “intent”: Conversion of receivables into CRPS conclusive of intent

It was contended by the Appellant that the true nature of the transaction should be unveiled in order to determine whether such preference shares should be treated as debt or not. The fact that there were outstanding receivables, which had become due and payable, the Appellant argued that conversion of the same into preference shares was in a way ‘subordination of debt’, i.e. debt which is having lower priority than other debt in terms of payment, and was with the objective of maintaining the debt-equity ratio. As clear from the communication between the parties, the CRPS merely acted as a temporary tool for borrowing, providing Matix “a pause point” under the arrangement entered by way of exchange of emails. Therefore, the substance of the transaction should be given weightage, and an expansive interpretation of the term “commercial effect of borrowing” should be applied, as was interpreted by the Apex Court while classifying home buyers as FCs.[1] In fact, the SC, in another matter[2] delved into the real nature of a transaction while determining whether a debt is a financial debt or an operation debt.

On this, the Court noted that the preference shares were issued upon conversion of outstanding receivables. The board of the preference shareholder exercised its commercial wisdom in accepting the shares, given the low recovery prospects. Therefore, what was actually a financial debt, extinguished owing to such conversion, and hence the appellant cannot pose as a financial creditor.There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding[3]. The SC, therefore, remarked:

“There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding. The egg having been scrambled, . . .  attempt to unscramble it, must necessarily fail.”

Debt vs. preference shares: Redeemable preference shareholder not a creditor

The SC placed reliance on the relevant provisions of the Companies Act, particularly Sections 43, 47, and 55, and held that preference shares form part of the company’s share capital and not its debt capital. Consequently, preference shareholders cannot be treated as creditors, nor can they initiate insolvency proceedings under Section 7 of the IBC, which is reserved for financial creditors.

The Court noted that –

“It is well settled in Company Law that preference shares are part of the company’s share capital and the amounts paid up on them are not loans. Dividends are paid on the preference shares when company earns a profit. This is for the reason that if the dividends were paid without profits or in excess of profits made, it would amount to an illegal return of the capital. Amount paid up on preference shares not being loans, they do not qualify as a debt.” (Emphasis added)

Dividends on preference shares are payable only out of profits or proceeds from a fresh issue of shares for redemption. Thus, only a profit-making company can redeem its preference shares, as profits accrue after all expenses, including interest on borrowings. To suggest that preference shareholders become creditors upon default, even when the company has no profits, would distort this basic principle. [4] As aptly stated in “Principles of Modern Company Law”[5]:

“The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this constraint; and that the debt holder will rank before the preference holder in a winding-up.”

In the context of a CIRP, initiation under Section 7 requires a “default”, a debt that has become due and payable. The Supreme Court observed that since preference shares are redeemable only out of profits or fresh issue proceeds, no “debt” arises unless such conditions exist; consequently, there can be no default under Section 7.

Difference between preference shareholder and a creditor was concisely captured in “A Ramaiya’s Guide to the Companies Act”[6]:

“It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding-up. In Lalchand Surana v. Hyderabad Vanaspathy Ltd., (1990) 68 Com Cases 415 at 419 (AP), where a preference shareholder was denied redemption in spite of maturity, he was not allowed to file a creditor’s petition for a winding-up order under s. 433(e) of the 1956 Act. An unredeemed preference shareholder does not become a creditor.”

A financial debt necessarily involves disbursal against the consideration for time value of money, typically represented through interest.[7] While interest may not be a sine qua non in every case[8], there must at least be an element of consideration for the time value of money. In the present case, no such disbursal or consideration existed and hence, the claim failed to meet the threshold of a financial debt.

As such, preference shares do not fall within the ambit of “financial debt” under Section 5(8)(f) of the Code, and equating them with financial creditors would distort the fundamental distinction between shareholders and creditors[9].

Whether accounting entries/recognition as “liability” would make a difference

It was contended that financial debt is an admitted liability in the books of accounts of Matix.

However, the SC[10], held the treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties as reflected in the documents executed by them. Further the IBC has its own prerequisites which a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resort to the treatment in the accounts this case cannot be decided.

Our Analysis

While the judgment firmly settles that preference shareholders cannot be treated as creditors, since shares represent ownership and not loans, the question often arises why such instruments, though debt-like in spirit and accounting treatment, are not “debt” under law. The rationale goes beyond mere nomenclature.

Ind AS 32 [Para AG25 to AG28] clarifies that in determining whether a preference share is a financial liability, or in other words, a debt, or simply an equity instrument, the shares has to be assessed against the rights attached to it, and whether it signifies a character of financial liability. In other words, if a preference share is redeemable at a specific date in the future at the option of the shareholder, such instrument carries a financial liability and is treated as such. However, it should be noted that every law has to be read in a given context. Treatment under accounting standards is more from the perspective of the financial position of the issuer. However, in case of IBC, the question is of rights – as a creditor will have right to file an application under section 7, but a shareholder will not have such right; similarly, a creditor will have a higher priority under section 53, while a shareholder stands in the lowest step of the priority ladder.

Therefore, the context in which accounting standards operate cannot be superimposed while interpreting the rights and liabilities under laws like the Code. Therefore, preference shares, depending on their terms of issuance may be classified as a liability for the purpose of complying with accounting principles, however, that cannot be said to be confer such preference shareholders the status of a creditor, and consequently, entitling them to file CIRP application under the Code.

Hence, there is a fundamental difference between “debt” and “shares” – a “debt” once converted into “shares”, moves from one end of the spectrum to another, and cannot retain its original nature and rights under the Code.

[1] Pioneer Urban Land and Infrastructure Ltd. and Another v. Union of India and Others ((2019) 8 SCC 416)

[2]  Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt Ltd and Anr. (2024 SCC OnLine SC 649)

[3] Commissioner of Income Tax v. Rathi Graphics Technologies Limited (2015 SCC OnLine Del 14470), where it was held that, where the interest or a part thereof is converted into equity shares, the said Interest amount for which the conversion is taking place is no longer a liability.

[4] Lalchand Surana v. M/s Hyderabad Vanaspathy Ltd. (1988 SCC OnLine AP 290)

[5] (Tenth Edition) at page 1071

[6] (18th Edition, Volume 1 Page 879)

[7]  Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and Others ((2020) 8 SCC 401)

[8]  Orator Marketing v. Samtex Desinz (Civil Appeal No. 2231 of 2021)

[9] Radha Exports (India) Private Limited v. K.P. Jayaram and Another ((2020) 10 SCC 538)

[10] Relied on State Bank of India v. Commissioner of Income Tax, Ernakulam ((1985) 4 SCC 585)

Read more:

Failed Redemption of Preference Shares: Whether a Contractual Debt?

Kabhi Naa, Kabhi Haan: Key Takeaways from the SC’s verdict in Bhushan Steel

Presentation on Interest under IBC: Balancing Creditor Recovery and Resolution Viability

A MIX OF EASE AND BURDEN: SEBI’s latest regulatory push redefines the role of DTs and issuers

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Palak Jaiswani, Manager and Lavanya Tandon, Senior Executive | corplaw@vinodkothari.com

Updated as on November 27, 2025

Regulatory reforms to ensure EoDB for Debenture Trustees are being discussed and implemented in phases since January, 2025. SEBI proposed amendments with respect to permissible activities of DTs, the manner of utilisation of Recovery Expense Fund, specified rights of DTs with corresponding obligations on issuers and introduction of a model debenture trust deed through a consultation paper (‘CP’) dated November 04, 2024, which were deliberated in its meeting held on December 18, 2024, and finally approved the revised proposals on June 18, 2025.

In this article, we have discussed threadbare the regulatory changes approved in June 2025 and notified in October, 2025 by SEBI and actionables arising therefrom for issuers & DTs, pursuant to amendments made in SEBI (Debenture Trustee) Regulations, 1993 (‘DT Regulations’), SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) that become effective from October 27, 2025 for DT Regulations and LODR Regulations and October 28, 2025 for NCS Regulations. The 2nd tranche of amendments approved by SEBI are notified by three circulars issued on November 25, 2025 relating to terms and conditions for undertaking permissible activities by DTs (SEBI Circular 1), utilisation of Recover Expense Fund (SEBI Circular 2) and timelines for submission of details by issuers to DTs (SEBI Circular 3).

Permissible Activities for DTs [newly inserted Reg. 9C in DT Regulations and SEBI Circular 1]

Key issue: 

SEBI primarily governs DTs through DT Regulations, which presently do not restrict DTs to undertake any activities. However, based on the revenue data of the top 5 DTs, SEBI raised a concern that DTs presently undertake other trusteeship activities, which are either regulated by other Financial Sectors Regulators (FSR) like (securitisation trustee, security trustee, public deposit trustee) or not expressly regulated by any authority (outside purview of SEBI such as being an escrow agent, facility agent, monitoring agent, trustee for unlisted NCDs), thus creating potential regulatory and systemic risks. Another limitation is that SEBI cannot effectively address investor grievances or issues arising from such unregulated activities.

Proposal: 

SEBI proposed to allow DTs to undertake such activities (not regulated by SEBI) which are governed by any Financial Sector Regulator (FSR). However, any other unregulated activities are required to be hived off to a separate legal entity within 1 year. However, later on SEBI dropped the proposal of hiving off in its meeting in December 2024.

Present Amendment: 

Fig 1: Activities permitted to be carried on by DTs

With respect to the term ‘Separate Business Unit’ (SBU) though not defined in the amendment, a reference can be drawn from the SEBI Board Agenda (Para 3.7.3.), now notified in SEBI Circular 1, which states that DTs shall undertake activities not regulated by SEBI through one or more Separate Business Unit of the DT, segregated by a Chinese Wall and ring-fenced from the SEBI regulated activities. This seems like a relaxation for the DTs, where permitted activities can be housed under one entity but only in different segments/ divisions, compared to the initial proposal of hiving off to a separate legal entity. 

A timeline of 6 months from the date of notification (i.e by April 27, 2026) has been provided to transfer permitted activities to a separate business unit.

Another major restriction which Reg. 9C (1) provides, is a prohibition on RBI-regulated entities to undertake DT activities. DTs which are also RBI-regulated are mandated to carry out activities of DT through a separate business unit only.

Additionally, Reg. 9C(2) mandates DTs to ring-fence the net worth stipulated in DT Regs. (Reg. 7A) to ensure that it remains insulated from any adverse impact arising from undertaking other activities by DT.

SEBI Circular 1 lists out the conditions imposed on DTs to carry out activities not regulated by SEBI:

Fig 2: Conditions on DTs for carrying out activities not regulated by SEBI

Standardisation of Debenture Trust Deed (‘DTD’) format 

Key issue: 

Extant regulatory framework viz. Reg 18 of NCS Regulations and Reg 14 of the DT Regulations do not provide for a standard format of DTD. Instead, the provisions indicate the mandatory contents of DTD as prescribed under section 71 of the CA, 2013 read with rule 8 of Companies (Share Capital and Debenture) Rules, 2014 and form SH-12. Due to this, DTDs were observed to have different contractual terms and their documentation varied from issuance to issuance. Hence, a standardised format was necessary for market optimisation, which is flexible enough to accommodate commercial understanding amongst the parties.

Proposal: 

In light of the concerns discussed above, Industry Standards Forum – Debt (ISF Debt), proposed four model DTDs categorised as secured public issue, unsecured public issue, secured privately placed issue and unsecured privately placed issue. Model DTD in case of secured NCDs was provided in the CP (broadly divided into 4 parts- see fig 2 below).

Fig 2. Indicative bifurcation of DTD as proposed in annex- 1 of the CP.

Present Amendment: 

While the model DTD is yet to be notified, SEBI has rolled out the enabling amendments in DT Regulations and NCS Regulations. As a result, the erstwhile requirement of having DTD in 2 parts viz. “Part  A  containing statutory/standard information pertaining to the debt issue; and Part B containing details specific to the particular debt issue” is done away with. 

In case the issuer intends to deviate from the to be notified format of DTD, DTs may permit, subject to disclosure of a key summary sheet of deviations along with the rationale in the offer document of NCDs (GID/ KID/ shelf prospectus).

Utilisation of Recovery Expense Fund (‘REF’) 

Key issue: 

Reg. 11 of NCS Regulations mandates issuers of NCDs to create REF with the stock exchanges to enable the DT to take prompt action for enforcement/legal proceedings in case of ‘default’. The existing framework (Chapter IV of Master circular for Debenture Trustees) only lists out the illustrative expenses (legal expenses, cost for hosting meetings etc) and not the explicit list of eligible expenses. Since, DTs require prior consent of debenture holders to utilise REF funds, the absence of a clear expense list often leads to delays and difficulties in obtaining approvals and reimbursements.

Proposal: 

SEBI proposed to provide an indicative list of eligible expenses for utilisation of REF (refer CP). Additionally, for eligible expenses, a mere intimation to the debenture holders would be sufficient to utilise REF. However, for other expenses, prior approval is still required. DTs will also be required to furnish a certificate from the auditor (format is yet to be notified) to the stock exchanges w.r.t eligible expenses to claim from REF.

Amendment & SEBI Circular 2: 

Newly inserted Reg. 15A(3) in the DT Regs allows DTs to utilise REF in the manner specified by SEBI. Manner of utilisation and other conditions, as approved by SEBI above, have been notified by SEBI Circular 2, which has the effect of modifying Chapter IV of Master Circular for Debenture Trustees. . 

As per the said circular, the following expenses can be reimbursed from REF without obtaining prior consent from debentureholders. However, DTs shall intimate debenture holders through mail and upload the details of reimbursement from REF on its website. 

  • Expenses related to enforcement/  legal proceedings
  • Voting process
  • Holding of meeting of debenture holders 
  • Filing court applications
  • Legal fees
  • Expenses for asset recovery services 
  • Appointment of legal consultants for enforcement/ legal proceedings 

Any other expenditure may be claimed only with the prior consent of the debenture holders followed by intimation thereof to the designated stock exchange. 

Further, in both the  cases, the DT is required to submit an independent auditors’ certificate regarding the expenses incurred to the designated stock exchange for its verification. The amount shall be released from the REF only after verification of the said certificate. 

Issuers to furnish information to DTs [Reg. 56 of LODR]

Key issue: 

Certain compliance obligations are bestowed upon DTs with express timelines, for which DTs rely on the information provided by the issuers. However, corresponding responsibility, in respect of such compliances, has not been explicitly established for the issuers.

Proposal: 

To specify the timeline for issuers to furnish information to the DT as per Reg. 56 of LODR Regulations to enable the DTs to keep a track of the status of compliances by the issuer and make necessary timely compliances as applicable to them.

Amendment and SEBI Circular 3: 

Reg. 56 of the SEBI Listing Regulations is amended to provide a timeline of 24 hours from the occurrence of the event or information, within which issuers are required to furnish information to the DTs.

Additionally, SEBI circular 3 has provided for the timelines for submission of the following reports / certificates by the issuer to the DTs (note that para 1.2 of chapter VI of DT Master Circular has specified the timelines for similar reports / certificates to be furnished by DTs to the recognised stock exchange). The timelines are applicable from the quarter ended December 31, 2025.

  1. Security Cover certificate 

Under the extant regulatory framework, DTs are required to monitor security cover maintained by the issuer in pursuance of regulation 15(1)(t) of the SEBI DT Regulations on a quarterly basis. Additionally, DTs are also required to obtain a certificate from the statutory auditor of the issuer on a half yearly basis and furnish the same to the stock exchange. Pursuant to para 1.2 of chapter IV of DT Master Circular, DTs are required to furnish the same to the stock exchange within 75/90  days from end of quarter 

Similar obligations are imposed on issuer under the Listing Regulations, where issuer is required to furnish security cover certificate u/r 54 along with the submission of financial results within 45/60 days from end of quarter (as per Reg. 52) Issuer is required to furnish the security cover maintenance certificate provided by the statutory auditor and compliance with covenants to the DT on a half yearly basis along with submitting financial results u/r 52 to the DTs within 24 hours from occurrence of event/ receipt of information. [reg 56(1)(d) of Listing Regulations and para 5.5 of chapter III of DT Master Circular].

Vide this SEBI Circular 3, SEBI has prescribed the timeline of 60/75 days from end of quarter for furnishing security cover certificate to the DT for further submission to stock exchanges. While the idea of this circular was to impose corresponding obligations on the issuer to submit necessary documents to DT, the issuers were already under the obligation to provide a security cover certificate to DTs within the timelines prescribed in Reg. 54 & 56. 

Evidently, Listing Regulations have a relatively stricter timeline on the issuers for furnishing the security cover certificate to the DT, which has to be complied with irrespective of the new timelines so prescribed.

  1. Other reports / certificates
Reports/ Certificate  Periodicity/timeline specified for the issuer in SEBI Circular 3 Periodicity/timeline specified for the DTs in the Master Circular 
A statement of value of pledged securitiesQuarterly basis
60 days – end of quarter 75 days – end of last quarter		Quarterly basis
75 days – end of quarter 90 days – end of last quarter
[Para 1.2 of chapter VI of the DT Master Circular]
A statement of value for Debt Service Reserve Account or any other form of security offered
Net worth certificate of guarantor (in case debt securities  are  secured  by  way  of  personal guarantee)Half yearly basis 
60 days – end of each half-year		Half yearly basis 
75 days – end of each half-year
[para 1.2 of chapter VI of DT master circular]
Financials/value of guarantor   prepared on basis of audited financial statement etc. of the guarantor (secured by way of   corporate guarantee)Annual basis 
60 days – end of each financial year		Annual basis
75 days – end of each financial year
Valuation report and title search report for the immovable/ movable assets, as applicable.Once in three years 
60 days  – end of the financial year		Once in three years 
75 days  – end of the financial year

It is to be noted that till now, the issuers were not expressly mandated by law to furnish the reports / certificates mentioned in point B above to the DT, but were still providing the same as per the terms specified in DTD. The issuers are obligated to furnish the above certificates / reports within the aforestated timelines.

Conclusion

This amendment, though focused on EoDB, has placed an enhanced responsibility on the DTs and issuers to ensure timely compliance. DTs are now required to conduct non-SEBI regulated activities through separate business units while keeping their net worth protected from any adverse impact and segregating the records and resources from the SEBI-regulated activities. A relaxation is also provided for claiming eligible expenses from REF without prior approval of the debenture holders.

Another highlight of the amendment is the introduction of model DTD, requiring issuers to disclose any deviations with proper justification in the offer document. However, the same is yet to be notified.

Also, disclosures by issuers to DTs are now time bound where items u/r 56 of Listing Regulations are to be provided within fixed timelines of 24 hours and other reports/ statements within defined timelines & periodicity. 

Our resources on the topic:

  1. SEBI unveils new reforms for Debenture Trustees
  2. SEBI approves a mix of reforms for regulated entities