Bank-NBFC Partnerships for Priority Sector Lending: Impact of New Directions

March 26, 2025/1 Comment/in Financial Services, NBFCs, Priority sector lending, RBI, Uncategorized /by Team Finserv

-Harshita Malik (finserv@vinodkothari.com)

Background

The Reserve Bank of India (RBI) has, after almost five years, updated its Priority Sector Lending (PSL) norms that prescribes the PSL limits for banks. PSL targets ensure an adequate flow of credit from the banking system to sectors of the economy that are crucial for their socio-economic contributions, with a focus on specific segments whose credit needs remain underserved despite being creditworthy.

On March 24, 2025, the RBI issued Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025 (‘New Directions’), in supersession of the 2020 Master Directions of Priority Sector Lending (PSL)- Targets and Classification, prescribing higher loan limits for housing and other loans, expanding eligible purposes for PSL classification, removing the interest rate limits caps in case of securitisation and transfer of loan exposures and including an increased list of eligible borrowers under certain categories. While these measures are expected to help banks achieve their overall targets, the limits and restrictions that persist within sub-categories often require banks to adjust underwriting standards to meet PSL requirements. The revised loan limits offer banks flexibility to address these challenges, while also providing room for growth acceleration.

Effective Date

The New Directions shall come into effect on April 1, 2025 and shall supersede the erstwhile directions on the subject, namely, the Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions dated September 04, 2020 (‘Erstwhile Directions’).

Further, all loans eligible to be categorised as PSL under the Erstwhile Directions (updated as on March 25, 2025) shall continue to be eligible for such categorisation under the New Directions, till their maturity.

Applicability

The New Directions are applicable to all commercial banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs), and Primary (Urban) Co-operative Banks (UCBs), excluding Salary Earners’ Banks.

Bank-NBFC Partnerships for PSL

Achieving PSL targets has always been an uphill task for banks, especially those without a strong retail branch network. PSL typically involves bite-sized/ small ticket loans to the last mile borrowers that come with borrower proximity, geographical presence, strong operational abilities and tailored recovery strategies, making it less appealing for banks to dive in wholeheartedly.

To add to the predicament, these sectors tend to bear higher risk compared to traditional borrowers, leading to a greater chance of defaults. Delinquencies in the early buckets—0+ and 30+ days past due – increased by approximately 110 basis points (bps) and ~55 bps, respectively, during the first quarter of fiscal 2025 compared to the preceding March quarter¹. This indicates a rising rate of defaults in the microfinance sector, making banks naturally reluctant to adopt the “ekala chalo re” model in priority sector lending.

When banks fall short of meeting their PSL targets, they turn to alternative methods to bridge the gap. One notably effective approach has been partnering with Non-Banking Financial Companies (NBFCs), a strategy that has seen increasing acceptance with most of the banks.

Figure 1: Bank-NBFC Partnership for Priority Sector Lending

When we talk about Bank-NBFC partnership, the same can broadly be undertaken in the following four ways:

Banks lending to NBFCs/HFCs for on-lending to priority sector borrowers;
securitisation;
Transfer of Loan Exposure (‘TLE’); and
Co-lending.

Banks Giving Loans to NBFCs or HFCs for On-lending Under the PSL Category

NBFCs have broader customer coverage across priority sectors, particularly in PSL categories such as agriculture and MSMEs. By channeling funds to NBFCs with defined end-use restrictions and lending terms, banks can achieve indirect exposure to the PSL sector. While the on-book exposure remains on the NBFC, the underlying loans are directed towards the priority sectors thereby enabling banks to benefit by fulfilling their PSL target. Bank loans provided to NBFCs/HFCs for on-lending are further classified into the following three categories:

Bank loans to MFIs (NBFC-MFIs, Societies, Trusts, etc.)

This category of loans remains unchanged, with the framework detailed as follows:

Attributes	Particulars of the framework
Borrowers	Registered NBFC-MFIs and other MFIs (Societies, Trusts, etc.) that are members of RBI-recognised Self Regulatory Organisation (SRO) for the sector
Eligible underlying loan	Loans eligible for categorization as priority sector advances under respective categories viz., Agriculture, MSME, Social Infrastructure and Others
Purpose of loan	On-lending to individuals and members of SHGs/JLGs
Conditions to be adhered	MFIs to adhere to the conditions prescribed under SBR Master Directions and MFI Master Directions
Cap on quantum of loans	Not specified
Maximum ticket size of underlying loans	Not specified

Bank loans to NBFCs (other than MFIs)

This category of loans remains unchanged; however, it has been clarified that the 5% cap on bank credit to NBFCs for on-lending is calculated based on the bank’s total PSL in the previous financial year. Further, compliance with the cap is to be ensured by averaging the eligible portfolio across four quarters of the current financial year. For instance, if the on-lending proportion for a particular quarter is more than 5% and then due to amortisation of the loan pools the same comes to below 5% in the remaining quarters, the limit shall be seen by averaging the exposure across all quarters in a particular financial year. The updated framework is detailed as follows:

Attributes	Particulars of the framework
Borrowers	Registered NBFCs other than MFIs
Eligible underlying loan	Loans eligible for classification as priority sector lending under the respective categories, viz., Agriculture and Micro & Small enterprises
Purpose of loan	On-lending to respective categories of priority sector lending, viz., Agriculture and Micro & Small enterprises
Conditions to be adhered	Banks to maintain disaggregated data of such loans in the portfolio.
Cap on quantum of loans	5% of individual bank’s total priority sector lending of the previous financial year Banks shall determine adherence to the caps prescribed by averaging the eligible portfolio under on-lending mechanism across four quarters of the current financial year.
Maximum ticket size of underlying loans (per borrower)	Agriculture: Upto Rs. 10 lakhs in respect of ‘term lending’ component under this categoryMicro & Small Enterprises: Upto Rs. 20 lakhs

Bank loans to HFCs

Under the New Directions, this category of loans has been explicitly designated as part of the ‘Housing’ category with the updated framework detailed as follows:

Attributes	Particulars of the framework
Borrowers	HFCs approved by NHB for refinance.
Eligible underlying loan	Loans eligible for classification as priority sector lending under the ’Housing’ category
Purpose of loan	On-lending for:Purchase, construction, or reconstruction of individual dwelling units.Slum clearance and rehabilitation of slum dwellers
Condition	Banks must maintain borrower-wise details of the underlying loan portfolio
Cap on quantum of loans	5% of individual bank’s total priority sector lending of the previous financial year Banks shall determine adherence to the caps prescribed by averaging the eligible portfolio under on-lending mechanism across four quarters of the current financial year.
Maximum ticket size of underlying loans (per borrower)	Aggregate limit of Rs. 20 lakhs

Securitisation

The New Directions streamline the eligibility criteria by removing interest cap-related provisions. This is a significant change and aligns with the fact that no such lending rates are prescribed by RBI for direct lending exposure by the banks or the NBFCs. Earlier, the RBI had also removed such lending rate restrictions in the case of microfinance loans. The removal of capping would allow originating NBFCs to focus on the other terms of loans and the end use to classify as PSL.

While the removal of the net interest margin cap allows substantial flexibility to the NBFCs, by way of downside, it may also allow NBFCs to charge higher interest rates to ultimate borrowers. The outlined changes might encourage banks to invest more in Securitisation Notes, as they would have fewer restrictions. However, it could also lead to a shift in focus away from the priority sector’s socio-economic objectives, as higher interest rates might deter borrowers from accessing these loans.

Further, the general conditions for investments in Securitisation Notes and explicit exclusion of loans against gold jewellery originated by NBFCs have been retained. The New Directions focus solely on ensuring that underlying loan assets are eligible for priority sector classification before securitisation, without the additional conditions that were there in the Erstwhile Directions.

Now, the investments by banks in ‘Securitisation Notes’ representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets subject to only the following two conditions:

Assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances, prior to their securitisation, and the transaction is in compliance with the RBI Guidelines on ‘securitisation of Standard Assets’ as updated from time to time; and
Loans against gold jewellery originated by NBFCs as underlying, are not eligible for priority sector status.

Transfer of Loan Exposures

The New Directions streamline the eligibility criteria for assignment/outright purchase of asset pools by banks, in the same manner as in the case of ‘investments by banks in Securitisation Notes’.

Now the assignment/outright purchase of the pool of assets by banks representing loans under various priority sector categories, except the ‘others’ category, will be eligible for classification under the respective categories, subject to the following conditions:

Assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances prior to the purchase and fulfil the RBI guidelines on ‘Transfer of Loan Exposures’;
Banks shall report the outstanding amount actually disbursed to priority sector borrowers and not the premium embedded amount paid to the seller; and
Loans against gold jewellery acquired by banks from NBFCs are not eligible for priority sector status.

Co-lending

Banks collaborate with other financial entities through lending partnerships, leveraging their partners’ origination expertise to gain exposure in the PSL segment. These co-lending arrangements involve a structured sharing of risk and reward, with specific lending process functions distributed between the co-lenders. As a result, banks are able to meet their PSL targets proportionate to their share in the loans facilitated under these partnerships.

The New Directions eliminate the temporary allowance for continuing old co-origination arrangements and clarify the eligibility of loans under these arrangements for priority sector classification, limiting it to their repayment or maturity timeline.

Scheduled Commercial Banks can co-lend with registered NBFCs (including HFCs) for priority sector lending, as per the guidelines issued on November 5, 2020. Loans under the earlier co-origination guidelines (September 21, 2018) will remain eligible for priority sector classification until repayment or maturity, whichever is earlier.

Comparison at a glance

	On-lending	Securitisation	TLE	Co-lending
Capping on exposure	5% of individual bank’s total priority sector lending of the previous financial year	No cap	No cap	No cap
Loan size caps	Loan size caps exist on the loan by the NBFC, e.g. Rs. 20 lakhs in case of home loans and Micro & Small enterprises loans, and Rs. 10 lakhs in case of agriculture loans.	The same loan cap that would have applied had the portfolio been originated by the bank for e.g. loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs	The same loan cap that would have applied had the portfolio been originated by the bank for e.g. loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs	The same loan cap that would have applied had the portfolio been originated by the bank for e.g., loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs
Credit exposure of the bank	On the borrower i.e. NBFC	On the pool of loans, though credit enhanced by the NBFC	On the pool of loans	On the pool of loans
PSL loans originated in the books of	NBFCs (including MFIs and HFCs)	NBFC (originator)	NBFC (transferor)	Banks (to the extent of share in the loan)
Additional compliance requirements	–	SSA Directions	TLE Directions	Co-lending Guidelines of 2020

Conclusion

The New Directions on PSL provide a significant update to the framework, aiming to enhance the flow of credit to priority sectors while making the process more efficient for banks and financial institutions. By clarifying the eligibility criteria for various mechanisms like bank-NBFC partnerships, securitisation, transfer of loan exposures, and co-lending, these amendments create a more streamlined and transparent approach for meeting PSL targets. The removal of certain provisions, such as interest rate caps and exemptions for MFIs, reflects a shift towards more simplified criteria that ensure compliance while maintaining focus on supporting critical sectors like agriculture, MSMEs, and housing. The clear guidelines on the involvement of NBFCs, HFCs, and other financial entities in PSL activities are expected to strengthen the collaborative efforts between banks and non-banking institutions, ultimately contributing to the economic growth and financial inclusion of underserved communities. As the revisions come into effect from April 1, 2025, banks and other eligible financial institutions must adapt their strategies to leverage these opportunities and fulfill their PSL obligations efficiently.

https://www.crisilratings.com/en/home/newsroom/press-releases/2024/09/for-mfis-asset-quality-hiccups-to-lift-credit-cost-curb-profitability.html ↩︎

Refer our related resources below:

Two’s cute, three’s a crowd?

March 19, 2025/1 Comment/in Companies Act 2013, Corporate Laws /by Staff

Layer restrictions under Section 186(1) of Companies Act, 2013

Simrat Singh, Executive | corplaw@vinodkothari.com

Regulations often attempt to curb opacity in corporate structures, transactions and arrangements. Opacity may quite often be the breeding ground for ulterior designs. Opaque corporate structures may be used for hiding the identity of real owners, or to shift corporate funds from entities. Section 186(1) of the Companies Act (‘Act’) is one such provision which restricts companies to make investments through more than two layers of investment companies. While the objective of removing opacity through several layers of entities becomes clear through this provision, however it also creates a tricky situation for several corporate houses which have a long vertical stretch of investments in entities. This restriction in itself raises several questions, such as:

What is covered under the ambit of ‘investments’?
What is meant by ‘investment through’?
Does this section relate to investment subsidiaries or investment companies in general? and so on.

Before we delve into the intent and implication of interpreting this section, it will be interesting to note that a similar provision exists under section 2(87) of the Act which only talks about putting a limit on the number of subsidiaries a company may have. Our detailed write up and FAQs on the same can be referred to.

Rationale behind 186(1)

When companies invest through multiple entities, the primary challenge for a lawmaker is the inherent lack of transparency that such structures can create. The topmost entity may try to route its investments through several layers to invest in a business in which investing directly may not be possible or even legal. This issue is succinctly captured by the Latin maxim “quando aliquid prohibetur ex directo, prohibetur et per obliquum” meaning “what you cannot do directly, you cannot do indirectly.” The concern here is that by using a series of interconnected entities, investors may circumvent regulatory intent, thus undermining the transparency and oversight that the law seeks to ensure. To address this, legislators have generally focused on two main mechanisms: enhancing disclosure requirements and limiting the number of entities through which investments can be made. Section 186(1) adopts the latter approach and restricts a company from making investments through more than 2 investment companies.

The JJ Irani Committee, [Pg 17, Para 8.1 to 8.6] in its deliberations, recommended against prescribing rigid group structures or limiting the number of subsidiaries, arguing that such restrictions could place Indian companies at a disadvantage relative to their global counterparts. Instead, the Committee advocated for a focus on transparency and governance, emphasizing robust disclosure requirements and greater supervision of subsidiaries through clear and accountable board processes.

However, the Joint Parliamentary Committee [Pg. 21, Para 4.10 (1)], which investigated the Stock Market Scam of 2008, had its reservations regarding use of a multi-layered approach for investment as this can make it difficult to trace the origin of the fund. The Department of Corporate Affairs also considered putting a cap on the number of investment companies that can be set up by an individual. In line with this, the Ministry of Corporate Affairs (MCA) at one point considered restricting investments to a single investment company [Pg. 254 para 11.8 (a)]. This suggestion, however, was not accepted, as it could stifle legitimate business structures and limit operational flexibility.

In 2016, the Companies Law Committee Report [Pg 60, Para 12.16] further explored this issue and proposed dispensing with certain restrictions under Section 186(1) of the Act. The Committee acknowledged that a multi-layered investment structure could be justified for legitimate business purposes. Despite this, the recommendation was not incorporated into the final amendment bill. As a result, the restriction limiting investments through no more than two investment companies remains in effect.

Similar restrictions were made applicable by the RBI on Core Investment Companies (‘CICs’) by way of para 7 of Master Directions on CICs wherein the number of layers of CICs within a Group (including the parent CIC) shall be restricted to two, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. Further, if a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.

Deciphering the language of section 186(1)

The provisions of the said sub-section reads as under –

“Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:

Provided that the provisions of this sub-section shall not affect,—

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.”

On the basis of the language used above, let us understand few terms and its implications in the instant context

What is an ‘investment company’ ?

As per the explanation to Section 186, an “investment company” for the purpose of this section means a company whose main business is investing in shares, debentures or other securities. A company is considered to be primarily engaged in this business if:

at least 50% of its total assets consist of investments in shares, debentures, or other securities, or
at least 50% of its total income comes from such investments.

Note that unlike the 50-50 test for determining an NBFC, an investment company has to fulfil either of the above conditions and not both at the same time.

What is an ‘investment’?

It is important to understand what ‘investment’ is, since 186(1) restricts investments being made by a company through another company(ies). Common examples of investment include subscription or purchase of shares, warrants, debentures or similar securities. However, purchase of trade receivables, extending credit facilities or making of loans would not count as investment.

‘Not more than two investment companies’?

What is prohibited is routing of investments through more than 2 investment companies. Note that Section 2(87) of the Act read with the Companies (Restriction on Number of Layer) Rules, 2017 restricts creation of more than 2 layers of subsidiaries. On a combined reading of the above, let’s examine whether the following structures are feasible or not.

In the above example, A is investing through 1 investment company (B Ltd.) into another company (D Ltd.) and therefore this structure is permissible.

A is investing through 2 investing companies (B and C Ltd.) into D and therefore the structure is permissible.

In the above example A is investing in E through more than 2 investment companies i.e. through B, C and D. Therefore, the above structure is not permissible as per law

When can it be established that a company has made investment ‘through’ another company?

The primary intent of 186(1) is to capture the conscious call of the investor to route the investment through several intermediary entities and then reach its destination. This has to be seen factually whether the intermediate entity is acting as an investment vehicle for its shareholders or is it making its own independent investment decisions. One may also look at the stake of investment in the investee company to determine whether the investor is using the investee company as a conduit for its own investments. In case an investment company has a diversified portfolio of shareholders, it becomes difficult to establish that the investment company is acting on the instructions of its shareholders. Purpose of the investment can also be used to determine whether the transaction is a bonafide one or not.

In the above example, will A be charged for violation of section 186?

It is the holding company which will be held as having violated the section. The section is applicable to such a scenario where A makes investment through more than 2 layers of subsidiaries. The idea is to trace the investments made by A and thereby keep the structure easy. Thus, when D makes an investment in E, the section will be attracted.

This can serve as an impediment for the other loops in the layers from making further investments out of their own funds. The applicability of this section under such circumstances can be mitigated if it can be proved that the investment in E was out of the own funds of D and not out of the investment made by A.

Ambiguous proviso?

The proviso to Section 186(1) contains two clauses that provide exemptions from its restrictions:

Foreign Company acquisition: If a company acquires a foreign entity that already has investment subsidiaries beyond two layers, the restrictions of Section 186(1) will not apply, provided that such a structure is permitted under the laws of the host country.
Mandatory investment subsidiary: If a company has a subsidiary that is legally required—by any law, rule, or regulation—to establish an investment subsidiary, the restrictions of Section 186(1) will not apply in this case either

Note that in both the above clauses, the word ‘investment subsidiary’ is used and not investment company as used in 186(1). This creates ambiguity regarding the scope of the sub-section. Whether 186(1) is applicable on only investment companies which are subsidiaries? Or is it to extend even to those investment companies which are not subsidiaries? Seemingly restricting the scope of 186(1) only to investment subsidiaries would somewhat defeat the purpose of 186(1) since tracking of funds in a holding-subsidiary structure is far easier than in a non holding-subsidiary relationship.

Rule 3 of the Companies (Restriction on Number of Layers) Rules, 2017 provides a little guidance on the inter-play between 186(1) and 2(87) by providing that the provisions of the rules are not in derogation to the proviso to 186(1). Which means that the so-called exemptions in clause i) and ii) of proviso to Section 186(1) will not get affected by the restriction of 2(87). In other words, restrictions of section 2(87) will not extend to exemptions claimed under clause i) and ii).

The above structure is exempt as per clause i) of proviso to 186(1) and is also permissible under 2(87) since restrictions of 2(87) do not apply to the exemptions of 186(1).

The above structure is breaching the limit of 2 layers of subsidiaries as laid down in 2(87), however since the above is allowed as per clause ii) of proviso to 186(1), the same is permissible under 2(87) as well.

Note that the term ‘not in derogation of’ is not used in the context of 186(1) but only for its proviso. This raises the question whether an investment company which is not a subsidiary will be counted for determining the number of layers under section 2(87) and whether an alternate arrangement of investment companies and subsidiaries can be utilized to create a complex group structure which is seemingly legal.

The above structure is legal as per law since A is investing in E through not more than 2 investment companies. Further, there is no violation of 2(87) since B, C and D are not subsidiaries of A

Similarly, the above structure, which is complicated and may induce diversion of funds, is legal as per law. Since there are only 2 investment companies in the structure and the number of subsidiaries for C is not more than 2.

If we factor in the exemption given to the first layer of WOS, then the above structure is also permissible. All we have to see is whether there are more than 2 investment companies in the structure and whether any one holding company has more than 2 subsidiaries or not.

No restriction on horizontal investments

It is to be noted that 186(1) does not restrict horizontal investments i.e. a company can invest in multiple entities and those entities can further invest in one single entity.

In the above example, there is no restriction on A investing capital through B and C into D since the investment is flowing through a horizontal set of entities. There can be more entities on the level of B and C and it will not be a violation of 186(1) even if those entities are investment companies and/or subsidiary companies of A. What is restricted is the vertical proliferation of investment entities to route funds.

Difference between 186(1) and 2(87)

While the intent of Section 2(87) aligns with that of Section 186(1) in terms of curbing opaque investment structures, the distinction lies in the specific mechanisms each provision seeks to regulate. Section 186(1) aims to restrict the creation of more than two investment companies, whereas Section 2(87) focuses on limiting the formation of more than two subsidiaries. It is clear that an investment company, which is also a subsidiary, would fall under the purview of both of these provisions. However, there are certain differences between the 2 as tabulated below:

Criteria	2(87)	186(1)
Applicability	On all companies except Banking company; Non-banking financial company, Insurance company,a Government company	On all companies.
Restriction on	Holding companies having more than 2 layers of subsidiaries	Investing through more than 2 investment companies
Entity at the end of the loop of the layer	Can be a body corporate	Has to be a company
Criteria of establishing relationship	Subsidiary can be either by way of control of composition of board of directors or by way of investment in total share capital of company	Holding company has to invest through investment companies. Investment can be in any security.

Conclusion

While the intention behind 186(1) is clear – to ensure greater accountability and prevent the concealment of ownership or the diversion of funds through complex, multi-layered corporate setups – the practical implications of this restriction present challenges, especially for businesses with long-established and legitimate vertical investment structures. Additionally, the distinction between Section 186(1) and Section 2(87) of the Act further complicates the regulatory landscape, particularly in terms of the relationship between subsidiaries and investment companies. Clearer guidelines and more specific interpretations of the law will be essential to ensuring its effective implementation without stifling operational flexibility.

Upsurge in UPSI list: Deemed UPSI or sensitivity dependant?

March 19, 2025/0 Comments/in Corporate Laws, LODR, PIT, SEBI /by Payal Agarwal

Critical Reg. 30 events assimilate into ‘illustrative guidance list’ of UPSI as SEBI strives for EoDB and easier compliance requirement

Team Vinod Kothari & Company | corplaw@vinodkothari.com

The idea of unpublished price sensitive information (‘UPSI’) is something which companies have to guard as confidential until disclosed to investors, as it may materially impact the stock prices. Price sensitivity of an event has to do with the impact of the event on the company’s profitability, turnover, long-term or short-term prospects, shareholding base, etc. The identification of these events is done based on the materiality of the event to the business and business model. The more prescriptive the list supplied by the lawmaker is, the more one takes away the sense of responsibility and accountability to the corporate team that flags corporate events as material. If the lawmakers flag them all, or flag a lot, the very seriousness of tagging an information as price sensitive is taken away.

Pursuant to SEBI (Prohibition of Insider Trading) Amendment Regulations, 2025 (‘present amendment’) SEBI has amended UPSI definition, effective from June 10, 2025^[1] inserting a longer list of information, some of which may seem purely operational or business-as-usual for listed companies. Whether each of this information will be regarded as “deemed UPSI”, thereby requiring compliance officers to do the drill of structured digital database entry to even trading window closure every time such an event occurs? While the amended definition seems indicative of this, the intent of the regulator seems otherwise. This article tries to explain.

Linking UPSI determination with material events under Reg 30 : the journey

The idea of linking UPSI determination with Reg 30 events is not new. In fact, the definition of UPSI under PIT Regulations originally included “material events in accordance with the listing agreement”, within the definition of UPSI. The same was subsequently omitted vide Amendment Regulations, 2018 effective from 1st April, 2019.

The omission of material events under LODR from the definition of UPSI was a result of the recommendations of the Committee on Fair Market Conduct, under the Chairmanship of Shri T.K. Viswanathan. The Committee noted that every material event under LODR is not necessarily price sensitive, and therefore, the explicit inclusion of the same as UPSI is not appropriate.

The Committee noted that the aforesaid regulation require disclosures of material events or information which may or may not be price sensitive. Accordingly, the Committee is of the view that all material events which are required to be disclosed as per the Regulation 68 of the LODR Regulations may not necessarily be UPSI under the PIT Regulations. Since, the definition of UPSI is inclusive, the Committee recommends the removal of explicit inclusion of “material events in accordance with the listing agreement” in the definition of UPSI.

Thereafter, SEBI vide a Consultation paper dated May 18, 2023, proposed restoration of material events under LODR in the definition of UPSI. The public feedback largely pointed out that all events or information under Regulation 30 of LODR Regulations may not have an impact on the price of securities, hence, it is not rational to extend the UPSI definition to all material events under Reg 30 of LODR.

In view of the same, another Consultation Paper was floated on 9th November, 2024 on expansion of the list of UPSI to include some specific events from Reg 30. Based on the public comments received on the Consultation Paper, SEBI in its Board Meeting dated 18th December, 2024 approved the said amendments to the definition of UPSI.

As mentioned above, the amendments have been notified vide the Amendment Regulations, 2025 effective from June 10, 2025 providing a long list of Reg 30 events within the meaning of UPSI.

List of information under definition of UPSI: illustrative or prescriptive?

The definition of UPSI contains two parts – (a) subjective meaning of UPSI, and (b) a list of events that may be considered as UPSI. To this end, the definition of UPSI reads as:

“unpublished price sensitive information” means … and shall, ordinarily including but not restricted to, information relating to the following:

XXX

The present amendment pertains to the second part of the UPSI definition. A question would arise on whether the list of events may be considered as indicative, illustrative of what may constitute UPSI, or prescriptive, providing a deeming status of UPSI to such events/ information without assessment of the probability of price-sensitive impact of such information.

The answer to the aforesaid has to be traced back from the recommendations of the High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992.

The Committee also felt that some illustrative examples of what would ordinarily constitute UPSI should be set out to clearly understand the concept. It would be important to ensure that regardless of whether the information in question is price-sensitive, no piece of information should mandatorily be regarded as ―UPSI. Towards this end, examples of events and developments information about which would ordinarily be regarded as UPSI, are listed – such as financial results, dividends, mergers and acquisitions, changes in capital structure etc.

XXX

To conclude, whether or not a piece of information is generally available or is unpublished would necessarily be a mixed question of fact and law. A bright line indicating the types of matters that would ordinarily give rise to UPSI are listed to give illustrative guidance. It could well also be possible that information from such events could be routine in nature and consistent with a long history. Information about the repetition of the same event on predictable lines would not render it to be UPSI unless deviated from. For example, the declaration of dividend at the same rate at which a company has declared dividend for the several years as per publicly stated dividend policy.

Hence, it can be well understood that the idea behind providing an illustrative list of events in the definition of UPSI is not to render the same as “deemed UPSI”, thus mandating the treatment of the same as UPSI. Rather, the intent is to provide illustrations for a better understanding of what may ‘ordinarily’, and not ‘mandatorily’, constitute UPSI.

As evident from the discussion in SEBI BM agenda, the events/ information added in the definition of UPSI pursuant to the present amendment are given for ‘illustrative guidance’. For instance, while addressing the comment in case of routine fund raising in the usual course of business, SEBI acknowledged the fact that if the fund raising is routine in nature and on predictable lines it would not materially affect the price and thus, may not be UPSI. Similarly, in response to the comment on providing specific meaning of ‘impact on management’, it was stated that the same would make it prescriptive, which is not the intent of law.

Therefore, listed entities continue to have the power to determine UPSI based on the expected impact of such an event or information on the price of securities of such entities. The list of events under the definition of UPSI only provides an indicative guidance.

Applicability of the amendments

The Amendment Regulations, though notified on 11th March, 2025, are effective on the 90th day from the publication of the same in the official gazette, that is, 10th June, 2025. Does that mean that the listed entities are not required to identify an event falling under the ‘illustrative list’ as UPSI during the said period, even if the same is price-sensitive? Can a listed entity contend that the categorisation of an event as UPSI, where such an event is falling under the elongated “attention list”, though price-sensitive, is not mandatory for UPSI originating prior to 10th June, 2025?

In our view, such a stance cannot be taken. The intent of the regulations have also been such that required companies to evaluate every event or information, for potential price-sensitivity, and based on such judgement, categorise an information as UPSI until made generally available to the public at large. Therefore, one cannot take a view that such an event was not UPSI prior to the amendments becoming effective, and will take the character of an UPSI only after 10th June, 2025.

An example will make the case clearer. Concrete discussions with respect to a proposed fund raising commenced from 1st May, 2025. The board meeting for approval of the fund raising proposal will take place on 12th June, 2025. Will the listed entity be required to categorise the information as UPSI from 10th June, 2025 (effective date of applicability of the amendments) to 12th June, 2025 (board meeting date on which the final decision will be made and Reg 30 intimation will be provided to the stock exchanges making the information generally available)?

Here, what needs to be evaluated is whether, in accordance with the UPSI guidelines of the entity, the person(s) in-charge of the identification of UPSI has considered the information to be of a price-sensitive nature. If the answer is yes, the information should have been categorised as UPSI from 1st May, 2025 itself, regardless of the applicability of the amendments.

On the other hand, if the same was evaluated and not considered to be price-sensitive at the time the information was concretised, assuming there has been no further developments subsequently that would give the information the character of being price-sensitive, such an information would not require UPSI categorisation even after 10th June, 2025. A third scenario would be where the information was, in fact, price-sensitive from the time of its concretisation, that is, 1st May 2025, however, not evaluated for price-sensitivity on the account of not explicitly covered under the definition of UPSI. In such a circumstance, the information was actually an UPSI since 1st May, and should have been categorised as such from that time itself. Pursuant to the present amendments, such information that was price-sensitive but not taken care of in the appropriate manner, would now come under the “attention list” of the listed entities.

Need for elongating the ‘illustrative list’ of UPSI

The discussion above makes it clear that the elongated definition does not necessarily result in providing a deeming character of UPSI to the specified events/ information under Reg 30. In such a case, a question may arise on the relevance of providing such an elongated list of UPSI.

The need for the present amendment has been set out in the Consultation Paper and BM agenda of SEBI in the following manner:

However, contrary to expectations, a study conducted by SEBI along with stock exchanges, revealed that, after the amendment to the definition of UPSI in the PIT Regulations, which removed the expression “material events in accordance with the listing agreement”, by and large, companies were seen to be categorizing only the items explicitly mentioned in PIT Regulations as UPSI. The market feedback also suggested that most companies consider this to be a ‘uniform practice’. Therefore, in light of the above observations, SEBI felt that there exists a need to review the definition of UPSI.

Events included in the ‘illustrative list’ of UPSI

A. Deemed material events (Para A of Schedule III) added to the UPSI list

Insertion in definition of UPSI	Relevant clause in LODR	Discussion in CP/ BM Agenda	VKCo guidance on UPSI categorisation
Change in rating(s), other than ESG rating(s)	New Rating(s) or Revision in Rating(s)	Upward/ downward revision to be considered UPSI.New ratings for fresh issue of securities will get covered under ‘change in capital structure’ or ‘fund raising proposed to be undertaken;Considering ESG Ratings are at a nascent stage, SEBI has excluded ESG rating.	Instances of revision may ordinarily have a price-sensitive impact. Also, while withdrawal of ratings is not explicitly covered, it should also be covered
Fund raising proposed to be undertaken	the decision with respect to fund raising proposed to be undertaken including by way of issue of securities (excluding security receipts, securitized debt instruments or money market instruments regulated by the Reserve Bank of India), through …	If the fund raising is routine in nature and on predictable lines it would not “be likely to materially affect the price of the securities” and thus may not be UPSI	It is common for NBFCs and other financial sector entities to raise funds through issuance of NCDs. Being routine in nature, such fund-raising would not constitute UPSI pursuant to the present amendment.
Agreements, by whatever name called, which may impact the management or control of the company	Agreements covered by Clause (5) and (5A) of Para A of Part A	Original proposal under CP required two conditions: (i) agreements that impact the management and control of the company and (ii) are in the knowledge of the company However, pursuant to BM, agreements impacting either ‘management’ or ‘control’ have been included.	Usually agreements which may impact the management or control are price sensitive in nature. However, if the change is purely inter-promoter transfers or similar agreements, which may not impact the working or operations of the entity, a view may be taken
Fraud or defaults by the company, its promoter, director, KMP, or subsidiary or arrest of KMP, promoter or director of the company, whether occurred within India or abroad	Fraud or defaults by a listed entity, its promoter, director, KMP, SMP or subsidiary or arrest of KMP, SMP, promoter or director of the listed entity, whether occurred within India or abroad	SMP excluded considering the same may not generally have a material impact on the price of securities of the listed entity. Such fraud, default or arrest should be in relation to the listed entity.	In determination of the materiality and hence, price-sensitivity of information under this clause, guidance may also be drawn from the ISN on Reg 30. Refer a brief note on the ISN here.
Changes in KMP other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor	Change in directors, KMP senior management, Auditor and Compliance Officer		MD/WTD/CEO not proposed to be re-appointed may be potential UPSI. Resignation of CFO or CS may be usual movement across entities, and , may not be in the nature of UPSI. On the other hand, any resignation citing governance issues, including that of an independent director, though not covered explicitly in the definition, should be considered as UPSI. Similarly, every instance of resignation by the statutory or secretarial auditor may not be UPSI. For instance, resignation on account of bandwidth or personal limitations of the auditor. .Resignation on account of corporate governance concerns, or indicating frauds/ accounting lapses etc may be considered as UPSI.
Resolution plan/ restructuring or one time settlement in relation to loans/borrowings from banks/financial institutions	Resolution plan/ Restructuring in relation to loans/borrowings from banks/financial institutions. One time settlement with a bank	No threshold limit provided since the same pertains to Para A item under Schedule III.
Admission of winding-up petition filed by any party /creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016	winding-up petition filed by any party / creditors events in relation to the corporate insolvency resolution process of a listed corporate debtor under the Insolvency Code		Filing a winding-up petition itself is a material event requiring intimation to the stock exchanges. Admission of such a petition is the second stage, and while the same may be ‘price-sensitive’, it is not clear as to what would be ‘unpublished’ for the purpose of ensuring PIT controls on the same. This appears to be one of the instances of events emanating from outside the entity, and hence, relaxations w.r.t. SDD entries and trading window closure may be availed (see discussion below).
Initiation of forensic audit, by whatever name called, by the company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report	Initiation of Forensic audit a) The fact of initiation of forensic audit along-with name of entity initiating the audit and reasons for the same, if available; b) Final forensic audit report (other than for forensic audit initiated by regulatory / enforcement agencies) on receipt by the listed entity along with comments of the management, if any.	While it was suggested to not consider receipt of final forensic report as UPSI, the suggestion was not accepted since the information regarding outcome of such forensic audit may also be UPSI	In our view, once the initiation of forensic audit is considered as UPSI, the said event, although disclosed as a material event, should continue to be considered as UPSI till the time the final forensic audit report is not made public.
Action(s) initiated or orders passed within India or abroad, by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, promoter or subsidiary, in relation to the company	Clause (19) and (20) of Para A of Part A of Schedule III	SMP excluded considering the same may not generally have a material impact on the price of securities of the listed entity	The explanation to the amended definition to UPSI provides that for the identification of events enumerated as UPSI, the guidelines for materiality referred to in para A of Part A will be applicable. Therefore, an imposition of penalty will require disclosure if the same exceeds the limits of Rs. 1 lakh by sector regulators/ enforcement agencies and Rs. 10 lakhs for other authorities. The materiality of an action taken vis-a-vis the price of the securities of the listed entity depends on various factors, such as criticality of the non-compliance warranting an action, severity of the action/ penalty, impact of the penalty on the reputation and profits of the listed entity etc. Hence, not each instance of action taken or penalty imposed would require identification as UPSI. Further, the UPSI under this clause, being an event emanating from outside the listed entity, relaxations with respect to SDD entries and trading window closure may be availed (see below)

B. Events determined as material (Para B of Schedule III) added to UPSI list

Insertion in definition of UPSI	Relevant clause in LODR	Discussion in CP/ BM Agenda
Award or termination of order/contracts not in the normal course of business	Awarding, bagging/ receiving, amendment or termination of awarded/bagged orders/contracts not in the normal course of business	Expected to have a significant impact on the revenue and profitability of the company. Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Outcome of any litigation(s) or dispute(s) which may have an impact on the company	Pendency of any litigation(s) or dispute(s) or the outcome thereof which may have an impact on the listed entity	Initial order and pendency or any litigation is available in the public domain, hence, not UPSI.Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business	Giving of guarantees or indemnity or becoming a surety , by whatever name called, for any third party.	Only such guarantees that are not in normal course of business will be UPSI Materiality will be based on thresholds provided under Reg 30(4) of LODR read with the ISN on Reg 30.
Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.	Granting, withdrawal , surrender , cancellation or suspension of key licenses or regulatory approvals	As regards the suggestion of defining key licenses and regulatory approvals, the same being dependent on the industry or sector, the same has not been defined separately. Here again, emphasis has been given on the likelihood of materially affecting the price of security of a listed entity for UPSI identification.

In our view, wherever an event is determined to be material by a listed entity, under Para B or Para C or any other residual clauses, such events are in the nature of UPSI. Thus, the clauses not expressly covered by the definition of UPSI, viz. product launch, capacity addition, strategic tie-up, loan agreements not in the normal course of business etc can also be in the nature of UPSI, based on its expected impact on the price of the securities of the listed entity.

Actionables pursuant to the revised definition of UPSI

As discussed above, the definition of UPSI, so far as the items specified thereunder is concerned, is illustrative and not prescriptive. Items that are of routine nature, or otherwise, are not expected to have a material impact on the price of securities of the listed entity can be excluded from UPSI categorisation. This requires a listed entity to first of all, have internal guidelines for identification of an event/ information as UPSI. Given the diverse items of information that may be material, it will be impossible to have a closed list of all; therefore, the list of potential UPSI items (UPSI Library) needs to be formulated by every listed entity based on probable impact on the relevant financial parameters (guidance may be drawn from the ISN on Reg 30 for Para B items), as well as feedback based on past events in the listed entity or relevant to such listed entity. The list should be (a) Dynamic – it will have to be populated regularly, based on a feedback system and (b) Granular – the more granular the items are, easier it will be to assign the first point of responsibility and to minimise the nodes or the stop-overs that information travels, from its first source of recognition to the ultimate centre.

Secondly, record is to be maintained with proper rationale for non categorization of an event or information as UPSI, particularly if the same falls within the illustrative list of UPSI as provided in the definition.

Needless to say, sensitisation of the relevant persons handling UPSI or such information that may be categorised as UPSI is crucial to ensure smooth functioning of the PIT controls.

Other amendments

In addition to the amendments made in the definition of UPSI, some guidance has been given with respect to UPSI not originating from within the listed entity.

Entry in Structured Digital Database (SDD)

For information not emanating from within the listed entity, the SDD entry may be done within 2 calendar days from the receipt of such information.

Trading window closure

For UPSI not emanating from within the listed entity, trading window closure is optional.

The SEBI Consultation Paper or BM Agenda does not have reference to the aforesaid amendments. However, it can be understood that in case of events not emanating from within the listed entity, the UPSI is neither germinated from the listed entity, nor does it have a journey as an UPSI prior to disclosure, since the disclosure is required to be made within a maximum of 24 hours from the receipt of such information.

The intent of trading window closure is to caution the Designated Persons against trading, while in possession of UPSI. However, for events emanating from outside the listed entity, there is hardly much time between the receipt of information by the listed entity and the publication of such information through stock exchange intimation, thus making it generally available. Refer a presentation on the trajectory of an information from UPSI to material event disclosure here (slide 28 onwards).

Hence, the closure of the trading window is not relevant in such circumstances. The concept of trading window closure and related compliances has been discussed in a short video here. Having said that, any person in receipt of UPSI is bound by the primary charging section of the PIT Regulations to ensure that no trade is undertaken by the person while in possession of UPSI, irrespective of whether the trading window is closed or not.

Conclusion

The present amendments bring in an illustrative list of items that may ordinarily be considered as UPSI, to provide guidance to the listed entities in ensuring compliance with the PIT Regulations in letter and in spirit. As discussed above, this cannot be taken to mean that a list of deemed UPSI has been provided, and the determination of UPSI remains with the listed entities based on the expected impact on the price of the securities. Further, while the new amendments are inspired from Reg 30 of LODR, the definition of UPSI is common for both equity and debt-listed entities. Here, it is also to be noted that Reg 51 of LODR, as applicable to debt-listed entities, requires disclosure of all price-sensitive information to the stock exchanges.

^[1] 90th day from the date of publication in the Official Gazette.

Sebi elongates unpublished price sensitive information list

Prohibition of Insider Trading – Resource Centre

Disclosure standard under Reg 30: Gains overpower pains

LODR Resource Centre

ROU ready? Quick guide to lease accounting from lessee perspective

March 19, 2025/0 Comments/in Accounting and Taxation, Financial Services, Leasing and Asset Financing /by Staff

Simrat Singh, Executive | finserv@vinodkothari.com

There is an age-old distinction between financial leases and operating leases; this arose from accounting standards, and has had a sunset, from the perspective of the lessee, because of a change in accounting standards. Globally, IFRS 16, replacing the earlier standards IAS 17, became effective from 1st January, 2019. Note that not every country has still adopted IFRS 16 – USA is a prominent exception.

The equivalent of IFRS 16 in India is Ind AS 116. Under Ind AS 116, there is no distinction between operating leases and finance leases from the perspective of a lessee. Instead, the lessee recognizes a right-of-use (‘ROU’) asset and a corresponding obligation-to-pay (‘lease liability’) on the lessee’s balance sheet, reflecting their right to use the underlying asset and the obligation to make lease payments.

In this write up, we try to briefly discuss the crucial aspects of lease accounting for an Ind AS compliant lessee.

Recognition and valuation of the ROU asset

The value of the ROU asset is essentially the value of the right which the lessee has to pay to the lessor. If the lessee is entitled to only a portion of the asset’s useful life, the value of the ROU asset is proportionally adjusted. However, its value cannot exceed the actual value of the underlying asset—it may be equal to or lower, depending on the lease terms. Essentially, the present value of the lease rentals is recognised as the ROU asset.

Depreciation of the ROU Asset

The ROU asset is depreciated linearly i.e. on SLM basis. The period for depreciation depends on the lease structure:

If ownership transfers to the lessee or the purchase option is certain to be exercised, the ROU asset is depreciated over its useful life.
If the lease terms do not provide for automatic transfer of ownership, the asset will be depreciated over the lease tenure.

Lease Rentals: Principal & Interest Components

Lease payments are split into two components:

Interest Component – Recognized as a finance cost in the income statement. The rate of interest should be the internal rate of return of the lessor or if the same is not available, then the incremental cost of borrowing of the lessee.
Principal Component – Adjusted against the lease liability, reducing the obligation over the lease tenure.

Net effect over the lease term

At the inception of a lease transaction, the ROU asset and lease liability are equal. Over time, they reduce at different rates:

The ROU asset declines through SLM depreciation (as discussed above).
The lease liability is reduced by the principal portion of each lease payment, eventually being zeroed down.

By the end of the lease tenure, both the ROU asset and lease liability reduce to NIL, reflecting the complete settlement of the lease obligation of the lessee.

Lets understand the above with the help of an illustration in excel [Link to sheet]

Accounting of lease
Asset cost	1000
Tenure	4 years
Interest rate (annual basis)	10%
Rental	₹315.47
NPV	₹1,000.00

Yearly rental payments
Year	Payment
1	₹315.47
2	₹315.47
3	₹315.47
4	₹315.47
Financial statement extract
Balance sheet	Y0	Y1	Y2	Y3	Y4
Assets:
ROU asset	₹1,000.00	₹750.00	₹500.00	₹250.00	₹0.00
Depreciation		-₹250.00	-₹250.00	-₹250.00	-₹250.00
Liabilities:
Lease liability	₹1,000.00	₹784.53	₹547.51	₹286.79	₹0.00
Write-off (amortization during the year)		-₹215.47	-₹237.02	-₹260.72	-₹286.79

Income statement		Y1	Y2	Y3	Y4
Depreciation expenses		₹250.00	₹250.00	₹250.00	₹250.00
Interest expenses		₹100.00	₹78.45	₹54.75	₹28.68

Cash flow statement		Y1	Y2	Y3	Y4
		₹315.47	₹315.47	₹315.47	₹315.47

Lets also understand the journal entries for a lease transaction

Journal entries

Creation of asset and corresponding obligation-to-pay

ROU Asset A/c Dr.

To Lease liability A/c

Charging depreciation on the ROU Asset

P/L A/c Dr.

To Depreciation A/c

Depreciation A/c Dr.

To ROU Asset A/c

Payment of lease rental

Interest component

P/L A/c Dr.

To interest of lease rental A/c

(Being interest on lease rental charged to P/L A/c)

Interest of lease rental A/c Dr.

To Cash A/c

(Being interest of lease rental actually paid in cash)

Principal component

Lease liability A/c Dr.

To Cash A/c

Exception from applicability of Ind AS

Note that there are two exceptions w.r.t applicability of IndAS 116 on a lease transaction, i.e. such a transaction may not follow the above set of rules and may be expensed as an ordinary lease transaction. The two exceptions are:

Short term leases- Leases of tenure up to 12 months. However, if the renewal of the lease is certain then this exception cannot be claimed.
Low value asset – if the underlying asset i.e. the asset which is the subject matter of the lease is of a small value. In such a case, the complexities of IndAS 116 may not apply should the lessee choose not to apply them.

Our other relevant resources on this topic:

FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations,2024

March 17, 2025/0 Comments/in Corporate Laws, LODR, SEBI /by Team Corplaw

Team Corplaw | corplaw@vinodkothari.com

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Refer our relevant resources below

LODR resource centre – https://vinodkothari.com/lodr-resource-centre/
Write-up captioned ‘Disclosure standard under Reg 30: Gains overpower pains’ – https://vinodkothari.com/2025/02/isn_on_reg30/
FAQs on Standards for minimum information to be disclosed for RPT approval – https://vinodkothari.com/2025/02/faqs-on-industry-standard-note-on-rpt-approval/
Presentation on Industry Standards Note on disclosure for RPTs – https://vinodkothari.com/2025/02/presentation-on-industry-standards-note-on-disclosure-for-rpts/
Secretarial auditors for listed entities: FAQs on disqualifications and prohibited services – https://vinodkothari.com/2025/01/secretarial-auditors-for-listed-entities-faqs-on-disqualifications-and-prohibited-services-2/

Sebi elongates unpublished price sensitive information list

March 13, 2025/0 Comments/in Corporate Laws, PIT /by Vinita Nair Dedhia

Critical Reg. 30 events assimilate into ‘illustrative guidance list’ of UPSI as SEBI strives for EoDB and easier compliance requirement

Refer amendment notified | Refer Consultation Paper

November 11, 2024 (updated on March 13, 2025)

– Vinita Nair | corplaw@vinodkothari.com

If your idea of unpublished price sensitive information (‘UPSI’), which companies have to guard as confidential until disclosed to investors, is something which may impact the stock prices, you now have a longer list of things, which may seem purely operational or business-as-usual for listed companies, but still sitting in the long list of “deemed UPSIs” that SEBI (Prohibition of Insider Trading) Amendment Regulations, 2025 has inserted, thereby making compliance officers do the drill of structured digital database entry to even trading window closure every time such an event occurs. The amendment takes effect from June 9, 2025 .

In our view, price sensitivity of an event has to do with the impact of the event on the company’s profitability, turnover, long-term or short-term prospects, shareholding base, etc. The identification of these events is done based on the materiality of the event to the business and business model. The more prescriptive the lists supplied by the lawmaker are, the more one takes away the sense of responsibility and accountability to the corporate team that flags corporate events as material. If the lawmakers flag them all, or flag a lot, the very seriousness of tagging an information as price sensitive is taken away.

Does the present amendment go in the same direction of making the regulations more prescriptive? May not be the case necessarily as SEBI BM agenda clearly demonstrates that the intent was to provide illustrative guidance and not define a scope making the regulations prescriptive, in view of the EODB perspective. For e.g. in case of routine fund raising in the usual course of business, SEBI acknowledged the fact that if the fund raising is routine in nature and on predictable lines it would not materially affect the price and thus, may not be UPSI. It also took note of certain suggestions and considered them in the final amendment., for e.g. doing away with trading window closure requirements where UPSI is not emanating from within the listed entity, excluding change in ESG ratings from UPSI ambit, excluding reference of senior management in some cases etc.

Background:

The N.K. Sodhi Committee Report of 2015 , while reviewing the definition of UPSI which included ‘material events in accordance with the listing agreement’, emphasized that it would be important to ensure that regardless of whether the information in question is price-sensitive, no piece of information should mandatorily be regarded as “UPSI”. Thereafter, in 2018, noting that all material events which are required to be disclosed as per the LODR Regulations may not necessarily be UPSI under the PIT Regulations, the Committee on Fair Market Conduct , recommended the removal of the explicit inclusion of “material events in accordance with the listing agreement” contained within the definition of UPSI. As listed entities did not follow the principles laid down in UPSI definition, it was decided to elongate the list of deemed UPSI events to guide the entities better in UPSI identification.

Earlier in May 2023, SEBI had proposed considering every material event as UPSI. Based on the feedback received for earlier CP citing concerns of significant increase in compliance management and potential perpetual closure of trading window, SEBI had kept the proposal on hold till revisiting the framework for material events disclosure, market rumour verification, trading plan provisions etc.

In December, 2024 SEBI notified LODR amendments in Reg. 30 & Schedule III for EoDB (effective December 12, 2024). The Industry Standards Note issued in relation to Reg. 30 disclosures guide on the manner of ascertaining the expected impact on value relevant for the purpose of determining the materiality (read our article here). Trading Plans were made flexible (effective November 1, 2024) to enable persons perpetually in possession of UPSI be able to trade.

Present Amendment:

A. Deemed material events (Para A of Schedule III) added to the UPSI list

Change in rating(s), other than ESG rating(s) [sub-clause vi]
■ Upward/ downward revision to be considered UPSI.
■ New ratings for fresh issue of securities will get covered under ‘change in capital structure’ or ‘fund raising proposed to be undertaken’;
■ Considering ESG Ratings are at a nascent stage, SEBI has excluded ESG rating.
VKCo Comments: Rating revision need not necessarily result in security/ instrument going below investment grade or resulting in a breach of any covenant, to be considered as UPSI. By virtue of the present amendment, revision from AAA to AA+ or from AA to AA (-) will also be considered as UPSI, as it will impact the cost of funds, investor’s perspective etc.
Fundraising proposed to be undertaken [sub-clause vii]
VKCo Comments: Reg 29 covers intimation of fund raising by issue of securities, term loans are anyways excluded. While fundraising by way of issue of capital is deemed UPSI, every instance of debt issuance may not necessarily be UPSI. SEBI BM agenda further clarifies that if instances of fund raising are routine in nature then the particular would not materially affect the price of securities in the first place. Therefore, such fundraising events may not be considered as UPSI.
Agreements, by whatever name called, which may impact management or control of the company. [sub-clause viii]
VKCo Comments: Where the company has knowledge about the agreement.
Fraud or defaults by the company, its promoter, director, KMP, or subsidiary or arrest of KMP, promoter or director of the company, whether occurred within India or abroad [sub-clause ix]
VKCo Comments: Fraud and default to have the same meaning as assigned to them under LODR Regulations [Sch III, Part A, Para A (6)].
■ As explained in LODR, default by a promoter, director, key managerial personnel, subsidiary shall mean default which has or may have an impact on the listed entity.
■ Fraud, defaults, etc. by senior management may not generally have a material impact on the price of securities and therefore, the same has been not included within the ambit of the said clause.
Changes in KMP, other than due to superannuation or end of term, and resignation of Statutory Auditor or Secretarial Auditor [sub-clause v]
VKCo Comments: MD/WTD/CEO not proposed to be re-appointed may be potential UPSI. Further, resignation of CFO or CS for better prospects, while may result in a change, may not be in the nature of UPSI. Resignations citing governance issues should be considered as UPSI.
■ Similarly, every instance of resignation by the statutory or secretarial auditor may not be UPSI. Resignation on account of corporate governance concerns, may be considered as UPSI.
Resolution plan/ Restructuring or one-time settlement in relation to loans/borrowings from banks/financial institutions [sub-clause x]
Admission of winding-up petition filed by any party / creditors, admission of application by the tribunal filed by the corporate applicant or financial creditors for initiation of CIRP against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency Code [sub-clause xi]
Initiation of forensic audit (by whatever name called) by the company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report [sub-clause xii]
Action(s) initiated or orders passed within India or abroad by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, KMP, promoter or subsidiary, in relation to the company. [sub-clause xiii]
VKCo Comments: Intent is to include matters covered in Clause 19 and 20 of Para A. Clause 19 items viz. search or seizure, re-opening of accounts, investigation may be in the nature of UPSI, but each of clause 20 items may not be UPSI. Actions like suspension, disqualification, debarment or closure of operations may be in the nature of UPSI. However, in case of fines & penalties, SEBI amended the monetary limits for disclosure of fine or penalty under clause 20 – Rs. 1 lakh for fine/ penalty imposed by sector regulators/ enforcement agencies (as provided in ISN dated February, 2025) and Rs. 10 lakhs for other authorities. Amounts lower than the thresholds are required to be disclosed on a quarterly basis as part of the Integrated Filing (Governance). While imposition of penalty or fine by sector regulators/ enforcement agencies reflect on the state of governance/ functioning of the entity, every instance of levy of fine or penalty may not be UPSI.

B. Determined material events (Para B of Schedule III) added to UPSI list

Award or termination of order/contracts not in the normal course of business [sub-clause iv]
Outcome of any litigation(s)/dispute(s) which may have an impact on the company [sub-clause xiv]
Giving of guarantees or indemnity or becoming a surety, by whatever name called, for any third party, by the company not in the normal course of business [sub-clause xv]
Granting, withdrawal, surrender, cancellation or suspension of key licences or regulatory approvals. [sub-clause xvi]
VKCo Comments: In our view, each of the events that is determined to be material by the listed entity are in the nature of UPSI. The clauses not expressly covered above viz. product launch, capacity addition, strategic tie-up, loan agreements not in the normal course of business etc can be in the nature of UPSI.

Actionable arising on UPSI identification under PIT Regulations

Authorised KMPs to consider the illustrative guidance and the industry standards note for determination of expected impact of value (in case of Sch III Para B items) and determine if the information in hand is a UPSI.
- The rationale should be recorded for future reference, in case of any query from stock exchange or SEBI in this regard.
Closure of trading window for DPs in possession of UPSI;
- Trading window shall not be closed for event / info emanating outside the listed entity;
- The facility of PAN freeze is presently available only in case of financial results. In other cases, the DPs will be required to be informed about the trading window closure and opening.
Recording of sharing of such UPSI, internally or externally, for legitimate purpose in the Structured Digital Database;
- Recording of UPSI which is emanating outside the listed entity has to be made in SDD within 2 calendar days from the receipt of such information.
Preserving the confidentiality of UPSI and ensuring making it generally available in accordance with the Code of Fair Disclosure.

Conclusion

While the present amendment indicating specific material events as illustrative guidance is better than the earlier proposal, law cannot prescribe an exhaustive list of UPSI events as it will differ from entity to entity. Given the diverse items of information that may be material, it will be impossible to have a closed list of all; therefore, the list of potential UPSI items (UPSI Library) needs to be formulated by every listed entity which is (a) Dynamic – it will have to be populated regularly, based on a feedback system and (b) Granular – the more granular the items are, easier it will be to assign the first point of responsibility and to minimise the nodes or the stop-overs that information travels, from its first source of recognition to the ultimate centre.

Speedy rights issue in 23 working days from BM

March 11, 2025/0 Comments/in Corporate Laws, SEBI /by Team Corplaw

-Sakshi Patil, Executive | corplaw@vinodkothari.com

Speedy-Rights-Issue-@-BM-approval-23-working-days Download

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NBFCs and HFCs get the Ticket to Qualified Buyers Club

March 3, 2025/0 Comments/in Financial Services, NBFCs, RBI, SARFAESI /by Staff

-Neha Malu & Dayita Kanodia (finserv@vinodkothari.com)

Under the SARFAESI Act, only qualified buyers can invest in security receipts (SRs). The term “Qualified Buyer” has been defined under section 2(1)(u) of the SARFAESI Act, 2002, to mean a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or an ARC or any asset management company making investment on behalf of a mutual fund, a foreign institutional investor registered with SEBI, or any category of non-institutional investors as may be specified by the RBI in consultation with SEBI from time to time, or any other body corporate as may be specified by SEBI.

Earlier, in exercise of the power to notify a body corporate as a QIB (now, QB)¹ for the purpose of SARFAESI Act, SEBI, vide Notification dated March 31, 2008² notified NBFCs registered under section 45-IA of the RBI Act, 1934, provided the following conditions were fulfilled:

systemically important non-deposit taking non-banking financial companies (NBFCs) with asset size of one hundred crore rupees and above³; and
other non-deposit taking NBFCs which have asset size of fifty crore rupees and above and “Capital to Risk – weighted Assets Ratio” (CRAR) of 10% as applicable to non-deposit taking NBFCs as per the last audited balance sheet.

Definition of Qualified Buyers Amended

Now, vide gazette notification dated February 28, 2025⁴, the scope of qualified buyers under the SARFAESI Act has been expanded to explicitly include all NBFCs and HFCs regulated by the RBI. This amendment clarifies and broadens the range of participants who can acquire security receipts from ARCs, thereby enhancing liquidity in the distressed asset market. This notification supersedes the earlier March 31, 2008 notification (discussed above).

However, the allowance for all NBFCs and HFCs to act as qualified buyers comes with the following conditions:

such non-banking financial companies including housing finance companies shall ensure that the defaulting promoters or their related parties do not directly or indirectly gain access to secured assets through security receipts; and
such non-banking financial companies including housing finance companies shall comply with such other conditions as the Reserve Bank of India may specify from time to time

Analysis of the conditions specified in the 28th February notification

The first condition provides that the NBFC or HFC participating as QB shall ensure that (1) the defaulting promoters or (2) their related parties do not, directly or indirectly, regain control over the secured assets through SRs.

The intent behind the condition quite evidently is to prevent defaulting promoters and their related parties from circumventing the resolution process and regaining control over the stressed assets through security receipts.

Now, the pertinent questions in relation to the above stated condition is (a) are as follows:

Who constitutes a “defaulting promoter” in the context of this condition, and does ineligibility extend indefinitely, or is there a specific timeline after which the promoter may become eligible?

Section 29A(c)⁵ of the IBC was introduced to prevent defaulting promoters from regaining control over their stressed companies through the resolution process. This aligns with the objective of the February 28, 2025, notification, which seeks to prevent defaulting promoters and their related parties from indirectly reacquiring secured assets via SRs.

Under section 29A(c) of the IBC, a promoter of a corporate debtor classified as an NPA for over a year is ineligible to participate in the resolution process unless the default is cured. The underlying principle is that those responsible for financial distress should not benefit from restructuring their own assets.

Further, as per the RBI Prudential Framework for Resolution of Stressed Assets, 2019, when changing control of a borrowing entity and reclassifying a credit facility as ‘standard,’ it must be established that the acquirer is not disqualified under section 29A of the IBC. Additionally, the ‘new promoter’ must not be linked – whether as a person, entity, subsidiary, or associate, domestically or overseas – to the existing promoter/promoter group.

Therefore, for interpreting the present condition, inference may be drawn from section 29A(c) of the IBC.

As for the timeline for re-eligibility, section 29A(c) provides that a promoter may regain eligibility upon full repayment of all overdue amounts, including interest and charges, before submitting a resolution plan. In the author’s view, a similar approach may be considered for the present condition.

What constitutes “direct” and “indirect” control in the context of this restriction?

Since the condition ensured at the time of issuance of SRs is required to be fulfilled by the ARC vide para 23.1(ii) of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, it comes to an intriguing question as to how can the NBFC/ HFC grant access to the defaulting promoters. The SR investor is simply one of the investors. Any sale of the loans, if any, will have to be done by the ARC and not the SR holder.

Therefore, it appears that the intent of this requirement, possibly applicable when the NBFC/HFC becomes a major buyer of the SRs, is that it does not have any specific funding or other obligation from the defaulter/ defaulter’s promoters.

From where will the definition of “related party” be derived?

The term “related party” has been defined in several legal frameworks like Companies Act, 2013, SEBI LODR Regulations (in case of listed companies), Accounting Standards (AS-18, Ind AS 24, as may be applicable) and IBC. This raises the question of which definition should apply in the present context.

In this context, section 2(2) of the SARFAESI Act provides that-

Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.

Given the above stated provision of the SARFAESI Act, it is reasonable to infer that the definition of “related party” may be derived from the Companies Act, 2013.

The second condition mandates compliance with any additional requirements that RBI may prescribe from time to time. This provision grants the RBI flexibility to introduce further safeguards or operational guidelines as necessary, ensuring that the participation of NBFCs and HFCs remains in line with evolving regulatory and market considerations.

Conclusion

In essence, the February 28, 2025, amendment marks a significant step in expanding the pool of qualified buyers to include all NBFCs and HFCs regulated by the RBI, thereby enhancing liquidity and participation in the security receipt market. However, the accompanying conditions ensure that increased participation does not lead to the compromise of regulatory objectives. Thus, while the amendment strengthens the investor base and improves liquidity in SRs market, it also introduces necessary safeguards to prevent potential misuse by entities with prior exposure to defaulting borrowers.

Related Resources:

The SARFAESI Act originally used the term Qualified Institutional Buyer (QIB), which was subsequently amended in 2016 and replaced with Qualified Buyer (QB). ↩︎
https://www.sebi.gov.in/acts/qibnotification.pdf ↩︎
In 2015, the threshold for classification of an NBFC as systemically important was increased from Rs. 100 Cr to Rs. 500 Cr but there was no consequent notification to modify the earlier notification in line with the changes in the regulatory framework for NBFCs. Even under the Scale-Based Regulation (SBR) framework, while references to Systemically Important NBFCs were replaced, the absence of an updated notification led to the continued reliance on the earlier definition. Consequently, to maintain regulatory continuity and consistency in the treatment of NBFCs, NBFCs with an asset size of ₹500 crore or more should have qualified as QBs. ↩︎
https://egazette.gov.in/%28S%28j1ssisiqkc1nzfdmqesgfw5u%29%29/ViewPDF.aspx ↩︎
Read more about the ineligibility criteria u/s 29A in our earlier article titled “INELIGIBILITY CRITERIA U/S 29A OF IBC: A NET TOO WIDE?” available at: https://vinodkothari.com/wp-content/uploads/2019/06/Ineligibility-Criteria-under-sec.-29A-of-IBC.pdf ↩︎

Archive for year: 2025

Background

Effective Date

Applicability

Bank-NBFC Partnerships for PSL

Banks Giving Loans to NBFCs or HFCs for On-lending Under the PSL Category

Securitisation

Transfer of Loan Exposures

Co-lending

Comparison at a glance

Conclusion

Layer restrictions under Section 186(1) of Companies Act, 2013

Rationale behind 186(1)

Deciphering the language of section 186(1)

What is an ‘investment company’ ?

What is an ‘investment’?

‘Not more than two investment companies’?

When can it be established that a company has made investment ‘through’ another company?

Ambiguous proviso?

No restriction on horizontal investments

Difference between 186(1) and 2(87)

Conclusion

Linking UPSI determination with material events under Reg 30 : the journey

List of information under definition of UPSI: illustrative or prescriptive?

Applicability of the amendments

Need for elongating the ‘illustrative list’ of UPSI

Events included in the ‘illustrative list’ of UPSI

A. Deemed material events (Para A of Schedule III) added to the UPSI list

B. Events determined as material (Para B of Schedule III) added to UPSI list

Actionables pursuant to the revised definition of UPSI

Other amendments

Conclusion

Recognition and valuation of the ROU asset

Journal entries

Exception from applicability of Ind AS

Background:

Present Amendment:

Actionable arising on UPSI identification under PIT Regulations

Conclusion

Definition of Qualified Buyers Amended

Analysis of the conditions specified in the 28th February notification

Conclusion

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