Archive for year: 2025
Private Credit AIFs: Lenders of Last Resort?
Updated as on 7th January, 2025
Simrat Singh | Finserv@vinodkothari.com
Private credit is becoming a new force in India’s lending ecosystem. As traditional banks and NBFCs operate under the strict regulations on capital, exposure and asset quality norms, they are often unable, or unwilling to cater to certain borrowers. In addition, for banks in particular, what kind of lending opportunities can be tapped is often a matter of having typecast lending products, policies and procedures. This leaves occasional, however, lucrative gaps in funding needs which are not serviced by regulated lenders. Into these gaps step in Private Credit AIFs (in India), Business Development Companies (BDCs) and Private Collateralized Loan Obligations (CLOs) (in the USA and Australia), these funds can structure deals creatively, customise financing to borrower needs and capture higher-yield opportunities that conventional lenders must pass over. What is emerging is a parallel channel of credit, one that is nimble, agile and focused.
Globally, this shift hasn’t gone unnoticed. Policymakers and institutions like the IMF have flagged the risks tied to private credit markets, especially around opacity, leverage and borrower quality (see below). Yet in India, the momentum continues to build. Tight constraints on banks, the rise of alternative asset managers and the unmet capital needs of businesses beyond the traditional credit universe are all fuelling rapid expansion.
This article examines what private credit is, why it is growing in India, the risks associated with this market and whether their growth creates regulatory arbitrage relative to banks and NBFCs.
What is Private Credit?
As per an IMF paper1, private credit is defined as “non-bank corporate credit provided through bilateral agreements or small “club deals” outside the realm of public securities or commercial banks. This definition excludes bank loans, broadly syndicated loans, and funding provided through publicly traded assets such as corporate bonds.
Simply, private credit is the lending by non-bank and non-NBFCs. The sector predominantly involves alternative asset managers2 who raise capital from institutional investors using closed-end funds and lend directly to predominantly middle-market firms3.
How is it Different From Normal Credit?
Unlike traditional credit, private credit is typically tailored to the specific needs of each borrower. Repayment terms can, for instance, be aligned with the timing of a funding round or disbursements can be structured to match capital expenditure plans. Interest rates may also be designed on a step-up basis, linked to the borrower’s turnover. Many elements that are otherwise rigid under RBI-regulated lending can be flexibly structured in private credit (see table 2 below). This flexibility is especially valuable for start-ups and small businesses, which often require customised financing solutions that traditional lenders may be unable to provide.
| Parameter | Private Credit | Traditional Credit |
| Source of Capita | Private debt funds (Category II AIFs), investors like HNIs, family offices, institutional investors | Banks, NBFCs and mutual funds |
| Target Borrowers | Companies lacking access to banks; SMEs, mid-market firms, high-growth businesses | Higher-rated, established borrowers. |
| Deal Structure | Bespoke, customised, structured financing | Standardised loan products |
| Flexibility | High flexibility in terms, covenants, and structuring | Restricted by regulatory norms and rigid approval processes |
| Returns | Higher yields (approx. 10–25%) | Lower yields (traditional fixed-income) |
| Risk Level | Higher risk due to borrower profile and limited diversification | Lower risk due to stronger credit profiles and diversified portfolios |
| Regulation | Light SEBI AIF regulations; fewer lending restrictions | Heavily regulated by RBI and sector-specific norms |
| Liquidity | Closed-ended funds; limited exit options | More liquid; established repayment structures; some products have secondary markets |
| Diversification | Limited number of deals; concentrated portfolios | Broad, diversified loan books |
| Role in Market | Fills credit gaps not served by traditional lenders | Core credit providers in the financial system |
Table 1: Differences between private credit and traditional credit
How Much of it is in India?
Global private credit assets under management have quadrupled over the past decade to US$2.1 trillion in 20234. Compared with the rest of the world, the private credit market in India is very small, with estimated assets under management of $25 billion to $30 billion as of March 31, 2025, representing about 0.6% of India’s GDP and 30-35% of the total investments made by AIFs in India.5
Figure 1: Private credit share (1%) as a part of overall corporate lending. Source: RBI, AMFI
Figure 2: Size of Private Credit Market. Source: RBI
Reasons for Rise in Private Credit?
Private credit is expanding rapidly because it steps in where traditional banks hesitate. It provides capital for last-mile project completion, cost overruns and promoter equity infusion; areas that fall outside the comfort zone of regulated lending. The asset class has also delivered consistently higher risk-adjusted returns, a compelling draw for global and domestic investors, especially through long phases of low interest rates.6
A key advantage lies in its flexibility. Private lenders can tailor covenants7, link returns to cash flows and restructure repayment terms during stress, offering a level of customisation that conventional bank credit cannot match. For investors, this translates into both diversification and access to high-growth segments that remain beyond the scope of mainstream credit markets.
Sector specific regulatory gaps: There is a concern that tighter bank regulation will continue to encourage the migration of credit from banks to private credit lenders8. Certain regulatory restrictions on banks directly push borrowers toward private credit:
- Real estate: Banks cannot lend for land acquisition (Para 3.3.1, Master Circular – Housing Finance), leading to real estate becoming a major private-credit segment, accounting for about one-third of all private credit deals.9
- Mergers & acquisitions: Banks are not expected to lend to promoters for acquiring shares of other companies (Para 2.3.1.6, Master Circular – Loans and Advances). Consequently, 35% of private credit deals involve M&A financing. However, RBI’s Draft Directions on Acquisition Finance proposes to somewhat ease this restriction.10
Apart from the above, The IBC significantly strengthened creditor rights and recovery prospects, boosting confidence among lenders and supporting the growth of private credit. At the same time, many borrowers, particularly smaller firms, those with weak earnings, high leverage or insufficient collateral, struggle to access bank loans making private credit a natural alternative11. This shift was further accelerated by an extended period of low global interest rates, which pushed investors to seek higher-yielding opportunities and increased capital flows into private credit strategies.
The most common structure for channelising private credit is an AIF – more specifically, a Category II AIF. A ‘Private Credit AIF’ is essentially an AIF whose primary investment strategy is direct debt financing (by investing in debt instruments) to borrowers outside the conventional banking/syndicated loan market. Since AIFs are not subject to the same regulatory framework as traditional lenders (for example, no deposit-taking, no CRR/SLR requirements etc.), they can offer tailor-made structures such as step‐up interest rates, bullet repayments, equity warrants, convertible features, etc.
A private credit fund requires long-term, stable capital, and frequent redemption demands can disrupt lending strategy. A closed-ended Category II AIF structure suits this model well, as it locks in investor capital for the fund’s life and prevents premature withdrawals. Private credit deals are idiosyncratic and difficult for outside parties to value or trade, lenders typically rely on long-term pools of locked-up capital for financing. One advantage AIFs have over mutual funds is that mutual funds are restricted to investing only up to 10% of their debt portfolio in unlisted plain vanilla NCDs.
Compared to private equity or venture capital, where performance depends heavily on market conditions and timing exits, private credit offers returns that are largely predetermined by contract. The trade-off, however, is that like most AIFs, these investments typically come with multi-year lock-ins and fewer exit opportunities, underscoring their inherently illiquid nature. Typically, investors which can commit long term capital are well-suited to invest in such AIFs – such as pension funds and sovereign wealth funds etc.
Rise of Business Development Companies
A Business Development Company (BDC) is a U.S. investment vehicle designed to channel capital to small and mid-sized businesses that lack easy access to traditional bank financing or public capital markets. BDCs were created by the U.S. in 1980, through amendments to the Investment Company Act of 1940 (see sections 2(48), 54 and 55), with a clear policy objective: to allow retail investors to participate in private credit and growth capital, an area previously accessible only to institutional investors.
As per a Federal Reserve Paper: BDCs are a way for retail investors to invest money in small and medium-sized private companies and, to a lesser extent, other investments, including public companies. BDCs are structured in different ways. Public BDCs refer to those with shares traded on national securities exchanges, and those whose shares are not traded on national securities exchanges but placed through SEC-registered or private placement offerings are non-publicly traded BDCs. BDCs typically finance middle-market firms—companies with EBITDA between $5 to $100 million, which historically have had limited access to funding from commercial banks and public debt markets. They also provide finance to development-stage companies in sectors such as technology, life science, healthcare information and services and sustainability industries, and private-equity owned or sponsored companies.
Structure and regulatory framework: Legally, a BDC is an unregistered closed-end investment company (fund). To qualify as BDC, a company must invest at least 70% of its assets in ‘eligible portfolio companies’ i.e. firms with market values below $250 million and provide ‘significant managerial assistance’ to its portfolio companies [see section 2(48) of the Investment Company Act, 1940]. These companies are often private, thinly traded public firms, or businesses undergoing financial stress. To avoid corporate-level taxation, they must distribute at least 90% of their taxable income to shareholders each year (like REITs and InvITs in India). BDCs are also permitted to use leverage (up to 2x the amount of assets).
BDCs raise capital through IPOs, follow-on equity issuance, corporate bonds or hybrid securities. While many BDCs are publicly traded on stock exchanges (50 in number), offering daily liquidity to investors, some exist as non-traded BDCs with limited liquidity (47 in number) and yet some as private BDCs (50 in number).12
Investment mix: Although BDCs are permitted to invest in both equity and debt, their portfolios are majorly debt-focused. In practice, 60–85% of a typical BDC portfolio is invested in debt instruments, such as senior secured loans, second-lien loans, or mezzanine debt. Equity investments usually comprise 15–30% of assets.13 Because of this allocation, interest income from loans is the primary driver of BDC earnings. This income tends to be steady and predictable, which aligns well with the BDC structure. For example, Ares Capital, one of the largest BDCs, allocates roughly 78–83% of its portfolio to debt (primarily first-lien loans) and about 17% to equity.
How BDCs generate returns: BDCs generate returns through multiple channels:
- Interest income from loans to portfolio companies (the dominant source)
- Dividends from preferred or common equity holdings
- Capital gains from selling equity stakes or converting and exiting convertible securities
Many BDC loans are floating-rate, which provides partial protection in rising interest rate environments. However, most BDC investments are below investment-grade or unrated and equity positions are often in privately held or financially stressed companies, introducing credit and valuation risk.
Comparison with venture capital, private equity AIFs and Mutual Funds: BDCs are often compared with venture capital and private equity funds because all three invest in private, illiquid companies and may provide strategic or managerial support. The key distinction lies in investor access and structure. Venture capital and private equity funds are privately placed vehicles, restricted to institutions and wealthy investors, with long lock-ups and limited transparency. BDCs, by contrast, are designed to be accessible to retail investors and trade on public exchanges.
This distinction becomes especially relevant when comparing BDCs with AIFs in India, particularly private credit AIFs. Economically, BDCs resemble private credit AIFs; both lend to mid-market companies and rely heavily on interest income. The crucial difference lies in retail participation. In India, AIFs exclude retail participation by making the minimum investment amount of Rs. 1 Crore and prohibiting public issuances. In the U.S., BDCs were created to enable retail participation therefore there are no minimum investment norms and public issuances are allowed for BDCs. In this sense, BDCs can be thought of as private credit AIF-like strategies wrapped in a publicly traded structure, placing them between mutual funds (fully liquid public-market vehicles) and AIFs (illiquid private-market vehicles) on the investment spectrum.
From an Indian regulatory perspective, mutual funds offer the closest structural comparison to BDCs, albeit with important distinctions. Indian mutual funds are not permitted to employ leverage as part of their investment strategy and may borrow only to meet temporary liquidity requirements, capped at 20% of net assets (see Regulation 44 of the SEBI Mutual Fund Regulations). In addition, mutual funds face strict asset-side constraints, including a limit of 10% of the debt portfolio in unlisted plain-vanilla non-convertible debentures (see paragraph 12.1.1 of the SEBI Master Circular on Mutual Funds). These restrictions constrain exposure to illiquid private credit, making a BDC-like structure regulatorily infeasible in India under the mutual fund framework.
Global context: No other major market has created a true equivalent of the BDC. While regions such as Europe, Canada, and Australia have listed private credit funds, specialty finance vehicles, or credit income trusts, these structures typically limit or discourage retail participation.
Risk considerations: While BDCs may have stable and regular income, they carry elevated risks. Their portfolios consist largely of non-investment-grade debt and equity in small or distressed companies, often with limited public information. Credit losses, economic downturns or excessive leverage can materially impact returns.
Regulatory Concerns with Growth of Private Credit?
IMF in its 2024 Global Financial Stability Report highlighted risks w.r.t rise in private credit since its growth comes with several structural weaknesses that make the market vulnerable, especially in a downturn. Its rapid expansion is happening largely outside traditional regulatory oversight and because the market has not been stress-tested, the true scale of risk remains unclear. Borrowers tend to be smaller and more leveraged and with most loans being floating-rate, repayment stress can escalate quickly when interest rates rise. Although private credit funds’ leverage appears low compared with other lenders, end borrowers tend to be more highly leveraged than those in public markets, increasing the risks to financial stability.14
The increased complexity and the interconnections with leveraged financial entities create more channels through which unexpected losses in private credit could spread to the broader financial system15
Instruments such as PIK interest16 only defer the problem, increasing loss severity if performance deteriorates. Liquidity is another pressure point since private credit funds are inherently illiquid. Risk is further amplified by layers of hidden leverage, at the borrower, SPV, investor and fund level making contagion hard to track. Layers of leverage are created by the AIF lending against equity to a holding entity, which infuses the equity into an operating company, and the operating company borrowing against such equity.
Because loans are private, unrated and rarely traded, valuation is opaque and losses may remain masked until too late. Growing competition also risks weakening underwriting standards and covenant discipline, particularly as larger banks participate in private deals.
Practical challenges add to this vulnerability. Collateral enforcement may not always hold up legally, say due to restrictions on transferability of collateral (say, shares of a private company). Equity-linked security is volatile as well, and during distress, equity tends to lose its value almost completely. In essence, private credit offers flexibility and returns, but its opacity, leverage, illiquidity and weaker borrower profiles create risks that could surface sharply in stress conditions. Private credit certainly warrants closer attention. Nonbank lenders, especially private credit funds, have grown rapidly in recent years, adding to financial stability risks because they are less transparent and not as firmly regulated.
Do private credit AIFs create any regulatory arbitrage?
What you cannot do directly, you cannot do indirectly – the age-old maxim might apply in case a RE which is otherwise barred by RBI for an object, uses the AIF route to achieve that object. Below we examine some of the distinctions in the regulatory oversight:
| Function | Private Credit AIFs | RE |
|---|---|---|
| Credit & Investment rules | ||
| Credit underwriting standards | No regulatory prescription | No such specific rating-linked limits. However, improper underwriting will increase NPAs in the future. |
| Lending decision | Manager-led Investment Committee under Reg. 20(7) may decide lending Manager controls composition of IC; IC may include internal/external members; IC responsibilities may be waived if investor commitment ≥₹70 Cr w/ undertaking Primarily i.e. the main thrust should be in: – Unlisted securities; and/or – Listed debt rated ‘A’ or below | Lending decisions guided by Board-approved credit policy |
| Exposure norms | Max 25% of investible funds in one investee company. | Exposure is limited to 25% of Tier 1 Capital per borrower and 40% per borrower group for NBFC ML; No such limit for NBFC BL. Banks can lend maximum upto 15% of their Tier 1 + Tier 2 capital to a single borrower. Large exposure norms may apply in case of banks and Upper Layer NBFCs |
| End-use restrictions | None prescribed under AIF Regulations, results in high investment flexibility | Banks cannot lend for land acquisition or for funding a M&A deal [refer ‘sector-specific regulatory gaps’ above] NBFCs do not have any such restrictions. They do have internal limits on sensitive sector exposures which includes capital market and commercial real estate [See Para 92 of SBR] |
| Related party transactions | Need 75% investors consent [reg 15(1)(e)] | Board approval mandatory for loans ≥₹5 Cr to directors/relatives/interested entities; Disclosure + abstention from decision-making;Loans to senior officers requires Board reporting [See para 93 of SBR] |
| Capital, Liquidity & Leverage Requirements | ||
| Capital requirements | No regulatory prescription as the entire capital of the fund is unit capital | Minimum net owned funds of ₹10 Cr, CRAR 15% for NBFC-ML and above [See para 133.1 of SBR]9% CRAR in case of banks, |
| Liquidity & ALM | Uninvested funds may be parked in liquid assets (MFs, T-Bills, CP/CDs, deposits etc.) [15(1)(f)] | NBFC asset size more than 100 Cr. have to do LRM [Para 26] |
| Leverage limits | No leverage permitted at AIF level for investment activities Only operational borrowing allowed | Leverage ratio of BL NBFC cannot be more than 7 No restriction on NBFC ML however, CRAR of 15% makes results into leverage limit of 5.6 times For Banks, in addition to CRAR, there is minimum leverage ratio is 4% |
| Monitoring, Restructuring and Settlements | ||
| Loan monitoring | No regulatory prescription | RBI-defined SMA classification, special monitoring, provisioning & reporting. |
| Compromise & settlements | No regulatory prescription | Governed by RBI’s Compromise & Settlement Framework |
| Governance, Oversight & Compliance | ||
| Governance & oversight | Operate in interest of investors Timely dissemination of info Effective risk management process and internal controls Have written policies for conflict of interest, AML. Prohibit any unethical means to sell/market/induce investors Annual audit of PPM termsAudit of accounts 15(1)(i) – investments shall be in demat form Valuation of investments every 6 months | A Risk Management Committee is required for all NBFCs. [See para 39 of SBR] AC [94.1], NRC [94], CRO [95] ID and internal guidelines on CG [100] required for NBFC-ML and above |
| Diversity of borrowers | Private credit AIFs usually have 15-20 borrowers. | Far more diversified as compared to AIFs |
| Pricing | Freely negotiated which allows for high structuring flexibility | Guided by internal risk model |
Table 2: Differences in regulatory oversight between AIFs and Regulated Entities (REs)
The core difference between private credit AIFs and RBI-regulated lenders lies in regulatory intent. SEBI is a disclosure-driven market regulator, it relies on transparency, governance and informed investor choice. RBI is a prudential regulator tasked with protecting systemic stability, and therefore imposes capital buffers, exposure limits and stricter supervision. Private credit AIFs operate within SEBI’s lighter, disclosure-based approach, while banks and NBFCs function under RBI’s risk-averse framework. This does not always create arbitrage, but it does allow credit activity to grow outside the prudential perimeter. As private credit scales, a coordinated SEBI-RBI framework may be necessary to preserve flexibility without compromising financial stability.
It is important to recognise that Category I and Category II AIFs are prohibited from taking long-term leverage. As a result, any loss arising from their lending or investment exposures does not cascade into the wider financial system. Therefore, concerns around applying capital adequacy requirements to these AIF categories are largely unwarranted.
Conclusion
Though still a small fragment of India’s wider corporate lending landscape, private credit AIFs are steadily gaining ground reaching those nooks and crannies of credit demand that banks and NBFCs often cannot, or would not, serve. Their ability to operate beyond the traditional comfort zone of regulated lenders is what makes this segment structurally relevant and increasingly attractive to borrowers and investors alike.
At the same time, rapid expansion brings the potential for regulatory arbitrage. The RBI has already acknowledged this risk, most notably through its actions on evergreening via AIF structures, ultimately resulting in exposure caps of 10% for individual regulated entities and 20% collectively, along with mandatory full provisioning where exposure exceeds 5% in an AIF lending to the same borrower. These measures serve as guardrails to prevent private credit vehicles from functioning as an indirect tool for evergreening of loans.
- IMF Global Financial Stability Report 2024 ↩︎
- Ibid ↩︎
- A middle-market firm is a firm that is typically too small to issue public debt and requires financing amounts too large for a single bank because of its size and risk profile. The size of middle-market firms varies widely. In the United States, they are sometimes defined as businesses with between $100 million and $1 billion in annual revenue. ↩︎
- IMF Global Financial Stability Report 2024 and Federal Reserve Note dated May 23, 2025 ↩︎
- India’s private credit market is coming of age: S&P Global and SEBI Data ↩︎
- RBI’s Financial Stability Report June 2024 ↩︎
- Customized lending terms can include, for example, the option to capitalize interest payments (that is, pay in kind) in times of poor liquidity ↩︎
- Cai and Haque 2024 ↩︎
- India’s private credit market is coming of age: S&P Global ↩︎
- See our article ‘Draft RBI Directions: Banks may finance Acquisitions’ ↩︎
- Chernenko, Erel, and Prilmeier 2022 ↩︎
- Source: https://sbia.org/bdc-council/ (Numbers are as on Q4 2024). ↩︎
- Source: S&P Global ↩︎
- Growth in Global Private Credit: Reserve Bank of Australia ↩︎
- From the speech of Fed Reserve Governor Lisa D. Cook on financial stability ↩︎
- Payment-in-kind (PIK) is noncash compensation, usually by treating accrued interest as an extension of the loan. ↩︎
See our other resources of Alternative Investment Funds here
New NBFC Regulations: A ready reckoner guide
-Team Finserv | finserv@vinodkothari.com
From 28th Nov 2025, all RBI regulated entities are governed by a completely new set of regulations.
We provide a complete comparative snapshot of the familiar old regulations and the new avatars. We have also shortlisted the changes, if any, as also commented for your comfort where there are no changes from the earlier regime.
Actionables: While there are rarely any significant substantive changes, however, REs may, at an early date, bring this major rewriting exercise to the knowledge of their boards, and proceed to make consequential changes in policies, SOPs, etc.
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Open in new tab Other Resources on the topic:
a. Old Rules, New Book: RBI consolidates Regulatory Framework
Draft RBI Directions: Banks may finance Acquisitions
– Conditions for acquisition finance, prudential limits and new LTV requirements for various capital market exposures
– Payal Agarwal, Partner | payal@vinodkothari.com
The Amendment Directions have been issued by RBI effecting changes as per the draft norms. See an article on the same here – https://vinodkothari.com/2026/02/rbi-permits-leveraged-buy-outs-through-bank-finance/
Capital markets are subject to higher fluctuations and volatility, and hence, Capital Market Exposures (CME) carry a higher risk, naturally requiring higher level of control and prudential norms by the regulator. The RBI recently released Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025, consolidating and amending the regulatory directions pertaining to CMEs. The proposed amendments are significant, providing for a flexibility of financing “acquisitions” in the secondary market while also strengthening the prudential requirements in relation to CMEs.
A voice without a vote: IBBI proposes OCs as observers amongst unrelated FCs in CoC
Team Resolution | resolution@vinodkothari.com
Where the CoC has no regulated financial entity and a single unregulated financial creditor holds over 66% of the voting share, effectively dominating all decisions, IBBI in its Discussion Paper dated 17th November, 2025 proposed that the five largest operational creditors will also be brought into the CoC meeting, giving them a seat and a voice in the discussions, even though they will not have voting rights.
Such operational creditors will be entitled to receive the notice, agenda and minutes of the meeting and may participate in deliberations. Notably, they cannot cast their vote in any of the agenda and merely attend the meeting as observers. However, the proposal suggests that the RP shall record their observations, if any, in the minutes.
The rationale behind such inclusion is that, in cases where the CoC does not have any regulated lender and an unregulated creditor effectively controls decisions with more than 66%, it raises a genuine concern about the quality and objectivity of CoC decision-making. Such a creditor may not have the financial or institutional expertise that banks and regulated entities typically bring to the process, and in some cases may even be a friendly or aligned party. This creates a risk that decisions may not withstand scrutiny and may dilute the credibility of what is otherwise treated as the CoC’s commercial wisdom.
However, the proposal does not fully take into account the following:
- Whether possible under subordinate law: The Code already provides for exclusion of related party financial creditors from CoC. The Code does not permit further exclusions or inclusions to be specified by IBBI. The only scenario where IBBI regulations can step in is where there are NO financial creditors. Therefore, whether this proposed inclusion of operational creditors is possible by way of amendments in regulations, can be a point of discussion. Notably, the constitutionality and the “intelligibility” of the distinction between financial and operational creditors was discussed and settled in very early rulings of the SC on the Code – viz., Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors., Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors. In those rulings as also in the frame of the Code, the image of a CD under insolvency has been one who has multiple financial creditors, primarily banks. The structure of the Code does not realize that in practice, there are several outliers. There are situations where insolvency may be a design rather than a fait accompli. In such cases, there may be a so-called financial creditor who has been introduced to avoid the formation of a CoC with operational creditors. Hence, the concern that IBBI is trying to address is quite well appreciated, but the issue is – are these remedies possible without the main law being amended?
- Regulated vs. unregulated financial creditors: The proposal seeks to distinguish between “regulated” vs. “unregulated” financial entities. The concerns as to quality, objectivity may still be there, as being a regulated entity does not guarantee these features. There are some 8000-odd NBFCs which are regulated. Technically, even the non-corporate moneylenders may also have registration under State money-lending laws and may claim to be regulated. The mere fact that a financial creditor is regulated does not ensure objectivity and transparency.
In fact, assume there is a single regulated entity holding the financial debt. The very fact that one entity has 66% share (that is, the voting share required to have decisions passed) in the admitted financial claims gives the creditor the right of complete control on the proceedings.
- The inclusion of OCs without voting rights raises concerns about utility: Their presence adds no real decision-making power, calling into question the practical value of their participation. The only silver lining may be that as the minutes of CoCs will capture the observations of the OCs, the NCLT while approving the plan may have regard to the fairness or otherwise of the decisions of the CoC. Going by the weight of SC views that AAs do not have the right to question the commercial wisdom of the CoC, whether a solo-powered CoC’s decisions will also carry the same aura of commercial wisdom remains to be seen.
- The core issue remains unaddressed: An unregulated financial creditor with over 66% voting share continues to dominate outcomes, while the OCs’ views are merely recorded without any mandatory impact on final decisions.
- The proposal diverges from the BLRC’s foundational reasoning: The BLRC Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. This proposal thereby contradicts the BLRC framework.
In this regard, the BLRC Committee noted as follows:
“Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.”
Our Views:
Even though the intent behind such a proposal is noble, it may fail its desired objective.. The intent of this provision can succeed only if the rights of OCs are clearly laid down. Securing a seat in CoC meetings and a right to put forward their views may be a welcome step for bringing OCs into the process. However, the actual influence that OCs can exert as mere observers remains uncertain. Only with time will it become clear whether their inclusion practically alters decision making in CoC meetings or merely remains a symbolic entry.
Also read our detailed article titled “Subordination of Operational Creditors Under IBC: Whether Equitable” [Published on 26th July, 2018]
| Other Proposals in the DP: 1. Mandate that the IM shall include the details of all allottees, including their names, amounts due, and units allotted, as reflected in the CD’s records, regardless of whether they have filed formal claims and require that the resolution plan provides for the treatment of such allottees. 2. Disclosure of receivables, JDAs and information on assets which are under attachment, should be mandatorily included in the IM 3. When the CoC recommends liquidation even though a compliant resolution plan of value greater than the liquidation value was received, the reasons for recommendation for liquidation shall be recorded and submitted in the application for liquidation to the NCLT. |
Microfinance: State of the Industry and Way Forward
This episode of Mahattva – Voices that Matter, brings together the heads of two prominent MFIs. Microfinance has been attracting attention of the entire financial system, with concerns as well as with significant optimist curiosity. Clearly, this is one segment of the financial system where financial inclusion is at its very core. We intend to have a range of questions of what are the causes of the current state of things, opportunities, way forward, induction of capital and debt, and regulatory advocacy.
A must-watch for everyone interested in microfinance. To watch it live, join our WA Channel on VKC NBFC Updates here- https://www.whatsapp.com/channel/0029Vb5epkr65yDCj3YJHg44
Read our resources on MFI lending here
The Hidden Hand: Understanding Beneficial Ownership in case of Trusts
Saket Kejriwal, Assistant Manager | corplaw@vinodkothari.com, finserv@vinodkothari.com
Background
The structure of a trust inherently creates a separation of roles, typically involving three distinct parties viz. the author/settlor, trustee, and beneficiaries. While the control/operations rests with the trustee, economic benefit lies with the beneficiaries, and the settlor may continue to exert influence through the trust deed or reserved powers, thus making it difficult to clearly identify who actually “owns” or “controls” the trust. This intrinsic separation of legal control, economic interest and potential influence renders trusts far more opaque than other conventional structures like companies or partnerships. What makes the structure even more complicated is that trusts are mostly governed by 19th century laws. Trusts are not required to publicly file information about their beneficiaries; in many cases, trustees may even contend that they are not maintaining any such regular list.
Adding to this complexity is the fact that trusts may be structured in different forms. Based on the degree of control with the trustees, trusts may be discretionary, where the trustee has full discretion to identify the beneficiaries and/or their share, or non-discretionary, where the beneficiaries have identifiable and predetermined rights in the trust property.There are trusts where the determination of beneficiaries is either contingent or future – for example, children and grandchildren of the settlor. In discretionary trusts, beneficiaries may not have a defined share or enforceable claim at any given point, making it unclear whether they can be treated as beneficial owners at all. In non-discretionary trusts, although the beneficiaries are identifiable, the trustee continues to hold legal title, again blurring the line of who truly “owns” the trust.
For Reporting Entities1 (“REs”), including Banks and NBFCs, identification and onboarding becomes more complex when the customer is a non-individual entity. The extent of verification varies by entity type, and trusts in particular create added challenges because of the reasons cited above.
Relevance of Identifying Beneficial Owners (‘BO’)
Before discussing how REs should identify a trust’s BO, it is important to understand why they must do so. Under para 9 and 10 of the RBI KYC Directions, 2016, every regulated entity is required to frame a Customer Acceptance Policy which, at a minimum, mandates that no account-based relationship or transaction may be undertaken unless full Customer Due Diligence (‘CDD’) is completed. The same is based on R.10 of The FATF Recommendations.
As defined under para 3(b) Clause (v) of RBI KYC Directions, 2016, “Customer Due Diligence means identifying and verifying the customer and the beneficial owner using reliable and independent sources of identification”. Further, clause 3 under explanation to the above para extends this requirement to “Determining whether a customer is acting on behalf of a beneficial owner, and identifying the beneficial owner and taking all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.”. Similar to what is prescribed under Rule 9(1) of PML Rules, 2005.
As part of CDD, REs are required to identify customers and their BOs, which in turn places a corresponding obligation on customers to truthfully disclose their ownership structure and furnish relevant documents that establish the identity of a natural BO. This process obliges REs to verify the authenticity and completeness of the information and documents submitted, use these findings to determine whether to establish the business relationship and to appropriately assign a risk rating.
However, in practice, BOs may be reluctant to provide their KYC documents due to privacy concerns, fear of scrutiny, or because complex structures were intentionally designed to keep the BO’s identity concealed.
Who are ‘beneficial owners’?
As per para 3(a)(iv) clause (d) of RBI KYC Directions, “Where the customer is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10 percent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership”. A similar definition is provided under Rule 9(3) of PML Rules, 2005.
Aforesaid definitions originates from The FATF Recommendations which clearly defines that in context of legal arrangements i.e. Trust, beneficial owner includes: “(i) the settlor(s); (ii) the trustee(s); (iii) the protector(s) (if any); (iv) each beneficiary, or where applicable, the class of beneficiaries and objects of a power; and (v) any other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above.”
In a discretionary trust, the trustee has full discretion, whereas in a non-discretionary trust, beneficiaries have fixed rights and the trustee has limited discretion. This influences who can practically be identified as exercising control.
Now, in the case of a discretionary trust, the above framework is usually manageable because the trustee, who exercises control, may not object to being identified as a BO. However, in a non-discretionary trust, the trustee does not exercise independent discretion. In such cases, the trustee may express reluctance to be classified as a BO because he does not “benefit” from the trust in an economic sense and may view BO identification as an unwarranted extension of responsibility. This confusion often results from equating BO with someone who derives economic benefit, whereas under AML laws the emphasis is on identifying at least one identifiable individual, ensuring that there is an accountable natural person whom authorities and REs can pursue in the event of ML/TF concerns, regardless of whether they receive monetary benefit.
Difference between BO and Beneficiary
It is important to understand that the terms “beneficiary” and “beneficial owner” serve different purposes. The objective of identifying the BO is not to treat the trustee or settler as recipients of trust benefits, but to ensure that the RE can clearly trace the natural persons involved in controlling, directing, and/or benefiting from the trust arrangement. BO identification is a regulatory requirement aimed at preventing misuse of trusts for ML/TF purposes, not a determination of who is entitled to trust assets. When viewed this way, trustee and settler identification becomes a matter of transparency and risk assessment, not a reclassification of their legal or economic rights under the trust.
Identification of the natural person behind the Trust
REs typically encounter two scenarios that require them to look behind the trust structure, first, when the trust is the direct customer, second, when the trust is recognised as a BO of another entity.
- Trust itself is the customer
When the trust itself is the customer, the BO identification framework is relatively straightforward. The PML Rules clearly prescribe that the following individuals must always be treated as BOs:
- the author/settlor,
- the trustee(s), and
- any beneficiary holding 10% or more interest, where such interest is defined or quantifiable.
These natural persons fall squarely within the definition of beneficial owners and should be identified and verified without debate.
Where specific beneficiaries cannot be identified, for example, in a public charitable trust, or in a private trust where beneficiaries do not meet the 10% threshold, the obligation to identify BOs does not fall away. In such cases, the RE must still identify:
- the author/settlor,
- the trustee(s), and
- any natural person exercising ultimate effective control, if any, .
Thus, the absence of identifiable beneficiaries does not dilute the requirement.
- Indirect Identification (Trust as a BO / Shareholder / Partner of Another Entity)
Complexity increases when the customer is not the trust, but another legal entity, such as a company, LLP, or partnership, in which a trust holds a substantial stake. In such cases, identifying the natural person as BO requires a deeper “look-through” analysis.
The Interpretive Note to Recommendation 10 of The FATF Recommendations provides a structured cascading approach to determine BOs of legal persons. This approach should be applied sequentially2:
Step 1: Identify the natural persons with controlling ownership interest
Determine whether any natural person ultimately owns or controls the entity through direct or indirect ownership (including ownership via the trust), if yes, identify the person(s) as BO.
Step 2: Identify natural persons exercising control through other means
If no natural person is identifiable through ownership, identify the natural persons exercising control of the entity through other means, such as through one or more juridical persons.
In such cases, the BO definition for trusts should not be imported from the definitions as discussed above i.e. all parties to the trust need not automatically be treated as BOs of the entity concerned.
Instead, the focus should be on identifying the natural person(s), whether trustee or settlor, who genuinely hold or exercise the relevant control over the underlying company, and evaluating them against the test of control.
Step 3: Identify the Senior Managing Official (SMO)
If no natural person can be identified under Step 1 or Step 2, the reporting entity must identify and verify a Senior Managing Official of the customer entity itself.
Intent behind this clause, might be to cater to conditions where the legal person is held by another legal person which is, in turn, held by a trust or where the trust is a charitable trust with no identifiable beneficiaries and no effective control exercised by the trustee, the chain may not yield any natural person with a controlling ownership or control interest. In such situations, the responsibility reverts to the customer entity itself, and the senior managing official (SMO) of the customer is identified as the BO for CDD purposes.
However, even in such cases, the SMO is identified purely for the purposes of AML laws, as discussed above. (see para 31 of the FATF Guidance on Beneficial Ownership of Legal Persons).
Difference between BO and SBO
While the concept of a BO and the concept of a Significant Beneficial Owner (SBO) under the Companies Act both aim to identify the natural persons behind an entity, the two frameworks differ significantly in scope and approach. The SBO definition focuses on identifying individuals who hold a prescribed level of ownership or control, and it does not provide a structured fallback if no individual meets that threshold.
In contrast, the BO identification under the Rule 9(3) PML Rules follows a cascading approach i.e. REs must first identify natural persons with ownership, then those who exercise control through other means. Further, only when neither approach detects a clear individual do the rules require identifying the senior managing official as the BO of last resort. This ensures that BO identification cannot be left blank, every entity must ultimately map to a natural person for AML purposes, even where no SBO exists, so that transactions are not carried out in benami or opaque structures.
Conclusion
It is important to clarify that being identified as a BO is primarily a regulatory formality for compliance. It does not alter a person’s rights, liabilities, or relationship with the trust or entity. The core objective is simply to ensure that there is a clearly identifiable natural person connected to the legal entity so that the RE can complete its due diligence and satisfy ALM requirements. Following are the limited obligations of being identified as a BO:
- Provide basic KYC documents or Official Valid Document (OVDs) for verification of identity;
- Respond to any follow-up queries during onboarding or monitoring; and
- Undergo periodic KYC updates, as requested by the RE.
- As per Section 2(wa) of PMLA Act, 2002 “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.
↩︎ - Refer footnote no. 37 of The FATF Recommendations ↩︎
SEBI approves relaxed norms on RPTs
- Materiality thresholds increased, significant RPTs relaxed for small-value RPTs and newly incorporated subsidiaries
Highlights:
Following a 32-pager consultation paper proposing significant amendments to RPT provisions, towards ease of doing business, rolled out by SEBI on August 4, 2025, several amendments were approved by SEBI in its Board Meeting on 12th September, 2025. The SEBI (Listing Obligation and Disclosure Requirements) (Fifth Amendment) Regulations, 2025 have been notified on 19th November, 2025 amending the RPT framework for listed entities.
Some of our comments on the proposals, as recommended to SEBI, have also been accepted in the approved decisions. Our comments on the Consultation Paper may be read here.
Applicability of the Amendment Regulations
While the Amendment Regulations have been notified, the amendments with respect to the RPT framework are effective from the 30th day of the notification of the Amendment Regulations, that is, with effect from 19th December, 2025.
1. Materiality Thresholds: From One-Size-Fits-All to several sizes for the short-and-tall
A scale-based threshold mechanism has been approved, such that the RPT materiality threshold increases with the increase in the turnover of the company, though at a reduced rate, thus leading to an appropriate number of RPTs being categorized as material, thereby reducing the compliance burden of listed entities. The maximum upper ceiling of materiality has been kept at Rs. 5,000 crores, as against the existing absolute threshold of Rs. 1000 crores. The thresholds have been provided in Schedule XII, along with an illustration towards better understanding of the materiality thresholds.
Materiality thresholds as specified in Schedule XII:
| Annual Consolidated Turnover of listed entity (in Crores) | Approved threshold (as a % of consolidated turnover) | Maximum upper ceiling (in Crores) |
| < Rs.20,000 | 10% | 2,000 |
| 20,001 – 40,000 | 2,000 Crs + 5% above Rs. 20,000 Crs | 3,000 |
| > 40,000 | 3,000 Crs + 2.5% above Rs. 40,000 Crs | 5,000 (deemed material) |
Back-testing the proposal scale on RPTs undertaken by top 100 NSE companies show a 60% reduction in material RPT approvals for FY 2023-24 and 2024-25 with total no. of such resolutions reducing from 235 and 293, to around 95 to 119. The 60% reduction may itself be seen as a bold admission that the existing regulatory framework was causing too many proposals to go for shareholder approval.
Our Analysis and Comments
With the amendments becoming effective, RPT regime is all set to be a lot relaxed, with the absolute threshold for taking shareholders’ approval to be doubled to Rs. 2000 crores. In addition, for larger companies, there will be a scalar increase in the threshold, rising to Rs. 5000 crores. A lot lesser number of RPTs will now have to go before shareholders for approval in general meetings.
In times to come, a multi-metric approach, depending on the nature of the transaction, may be adopted, drawing on a consonance-based criteria as seen in Regulation 30 of the LODR Regulations, thus offering a more balanced and effective approach. See detailed discussion in the article here.
2. Significant RPTs of Subsidiaries: Plugging Gaps with Dual Thresholds
Extant provisions vis-a-vis Amended Regulations
Pursuant to the amendments in 2021, RPTs exceeding a threshold of 10% of the standalone turnover of the subsidiary are considered as Significant RPTs, thus, requiring approval of the Audit Committee of the listed entity. The following modifications have been approved with respect to the thresholds of Significant RPTs of Subsidiaries:
- ‘Material’ is always ‘Significant’: RPTs of subsidiary would require listed holding company’s audit committee approval if they breach the lower of following limits:
- 10% of the standalone turnover of the subsidiary or
- Material RPT thresholds as applicable to listed holding company
This is a mathematical impossibility, since materiality threshold is based on “consolidated turnover”, and hence, includes the turnover of the subsidiary. Further, unlike networth, turnover cannot be a negative number, and hence, even if one or more of the subsidiaries of the listed entity are loss-making entities, the same cannot reduce the consolidated turnover of the listed entity to a number below the standalone turnover of its subsidiaries, whose accounts are being consolidated with the entity.
- Exemption for small value RPTs: The threshold for Significant RPTs is subject to an exemption for small value RPTs based on the absolute value of Rs. 1 crore. Thus, where a transaction between a subsidiary and a related party (of the listed entity/ subsidiary), on an aggregate, does not exceed Rs. 1 crore, the same is not required to be placed for approval of the Audit Committee of the listed entity, even if the aforesaid limits are breached.
- Alternative for newly incorporated subsidiaries without a track record: For newly incorporated subsidiaries which are <1 year old, consequently not having audited financial statements for a period of at least one year, the threshold for Significant RPTs to be based on lower of:
- 10% of aggregate of paid-up capital and securities premium of the subsidiary, or
- Material RPT thresholds as applicable to listed holding company
The aggregate value of paid-up capital and securities premium, to be considered for the purpose of determination of Significant RPTs, should not be older than three months prior to the date of seeking AC approval. Since the value of paid-up capital and securities premium would be available with the company on a real-time basis, the same does not result in any additional compliance burden.
Our Analysis and Comments
For newly incorporated subsidiaries, the Consultation Paper proposed linking the thresholds with net worth, and requiring a practising CA to certify such networth, thus leading to an additional compliance burden in the form of certification requirements. Following the approval in SEBI BM, the Amendment Regulations provide a threshold based on paid-up share capital and securities premium, and hence, certification requirement does not arise.
3. Clarification w.r.t. validity of shareholders’ Omnibus Approval
Existing provisions vis-a-vis Amended Regulations
The existing provisions [Para (C)11 of Section III-B of LODR Master Circular] permit the validity of the omnibus approval by shareholders for material RPTs as:
- From AGM to AGM – in case approval is obtained in an AGM
- One year – in case approval is obtained in any other general meeting/ postal ballot
Pursuant to the Amendment Regulations, the timelines have been incorporated as a proviso to Reg 23(4). Further, a clarification has been incorporated that the AGM to AGM approval will be valid till the date of next AGM held within the timelines prescribed as per section 96 of the Companies Act.
4. Exclusions for retail purchases
Proviso (e) to Regulation 2(1)(zc) of the extant SEBI LODR Regulations exempted transactions involving retail purchases by employees from being classified as Related Party Transactions (RPTs), even though employees are not technically classified as related parties. Conversely, it includes transactions involving the relatives of directors and Key Managerial Personnel (KMPs) within its ambit.
The CP proposed that the exemption related to retail transactions should be expressly limited to related parties (i.e., directors, KMPs, or their relatives) to grant the appropriate exemption.
Under the extant framework, retail purchases made on the same terms as applicable to all employees were excluded from the meaning of RPTs when undertaken by employees, but not when made by relatives of directors or KMPs. This led to an inconsistent treatment, where similarly situated individuals receive different regulatory treatment solely on the basis of their relationship with the company.
Pursuant to the Amendment Regulations, the exclusion for retail purchases has been extended to the relatives of the directors/ KMP, when undertaken on “terms which are uniformly applicable/offered to all employees, directors, key managerial personnel and relatives of directors or key managerial personnel ”. While the language refers to terms offered to “employees, directors, key managerial personnel and relatives of directors or key managerial personnel”, the same cannot be read to mean that preferential terms can be granted to “director”, “KMPs” or “relatives of such directors/ KMPs” as a separate class. The terms need to be uniform to what is otherwise offered to “employees” by such a listed entity/ its subsidiaries.
5. Exemptions for RPTs between holding company and WoS
Regulation 23(5)(b) provides an exemption from audit committee and shareholder approvals for transactions between a holding company and its wholly owned subsidiary. However, the term “holding company” used in this context has remained undefined, leaving ambiguity as to whether it refers only to a listed holding company or includes unlisted ones as well.
A clarification has been inserted to provide the interpretational guidance that the term ‘holding company’ refers to the listed entity. The relevance of the aforesaid clarification would primarily be in cases where the unlisted subsidiary of the listed entity enters into a significant RPT with its wholly owned subsidiary (step-down subsidiary of the listed entity). Pursuant to the aforesaid proposal, as approved, no exemption will be available in such a case.
Conclusion
The amendments seem more or less welcoming, relaxing the RPT regime for listed entities. With the new leadership at SEBI meant to rationalise regulations, it was quite an appropriate occasion to do so. In sum, SEBI’s iterative approach to RPT governance demonstrates commendable responsiveness, contributing to the ease of compliances and in turn, of doing business by the companies.
Our resources:
FAQs on contra trade restrictions under PIT Regulations
Team Corplaw | corplaw@vinodkothari.com
Updated as on November 19, 2025
Also access our Resource Centre on PIT here:
Downstreamed through intermediaries: Deemed public issue concerns for privately placed debt
– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
While equity is the “flavour of the season”, companies can produce efficient returns on equity only if they leverage it; therefore, companies are also reaching out to investors through debt issuance. Most of the bond issuance in India is privately placed; however, it is increasingly common for companies to reach out, mostly through intermediaries, to HNIs and other investors to invest in privately placed listed debt. While some of it happens through OBPPs (see an article on Regulatory framework for Online Bond Platform), much of it is simply distributed to investors by brokers, portfolio managers, distributors, investment advisers, and so on. Question is, if a privately placed bond issue is downsold, through intermediaries, to more than 200 investors, will the issue itself be regarded as a “deemed public offer” and therefore, require compliance with public offer norms as per Part I of Chapter III of the Companies Act, 2013 read with Chapter III of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
If you cannot do something, you cannot employ someone to do it. In Sanskrit Nyayavali, there is a maxim that reads:
यः करोति स करोत्येवेति न्यायः
This maxim is used to denote that the responsibility of one who sets another to do a thing is quite equal to that of the doer himself. That is, what you cannot do, you cannot employ someone to do.
If a bond issuer engages an intermediary to downsell an issue to an undefined group of investors, it must be taken to be the act of the issuer itself. While mostly the focus is on the magical number 200, but 200 is only the “deeming line”. The real line of distinction is – did I reach out to a closed group of investors who were known to me, or did I make a wide and open offer to whoever might be interested. Even if one might contend that all the offerees were known to the offerers, the 200 lakshman rekha will still apply and will result in the so-called private placement being taken as a public offer.
This article discusses:
- The contours of the deemed public offer provision in context of bonds
- What difference would be made if the bonds were privately placed and listed
- Is the limit to be counted for all bonds issued in a year, or per ISIN or per bond issuance?
- What if the intermediary buys the bonds from secondary market and then downsells the same?
- How is the nexus between the bond issue and downselling derived/deduced?
- What difference is made if the bonds are sold on OBPPs? What are the defining features of an OBPP, as opposed to securities intermediaries?
- So, in what circumstances will a downsold bond not result in a breach of sec. 25(2) and 42 of the Companies Act / NCS Regs?
There have been various actions taken by ROC against use of crowdsourcing platforms for equity shares. Refer our article on Crowdsourcing funds faces stiff penal actions.
Contours of deemed public offer on bond issuance
Section 25(2) of the Companies Act specifies cases that may be considered as a deemed public offer.
For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown—
(a) that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or
(b) that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it.
Additionally, in terms of section 42(11) of the Act, a private placement offer, non-compliant with the provisions of Section 42(2) shall be deemed to be a public offer and shall attract the provisions as applicable to any public offer. Section 42(2) requires that a private placement offer be made only to pre-identified investors and to not more than 200 persons in a financial year. Penalty for breach of section 42 may stretch to the amount of funding raised, capped at Rs 2 crores. Further, the issuer is also required to refund all monies with interest to subscribers within a period of 30 days of the order imposing the penalty. The interest is to be paid at the rate of 12% p.a. calculated from the expiry of the 60th day from the date of the receipt of application money for such securities till the time the money has been refunded.
Thus, downselling of bonds by the investor within 6 months of issuance by the bond issuer results in a deemed public offer. Further, in case of a public offer, section 40 mandates the listing of securities, in case of public offer of securities. In case of listed or proposed to be listed securities, Section 24 of the Act extends SEBI’s authority to administer the provisions of the Act (Chapter III and IV) in relation to the issue and transfer of such securities.
Deemed public issue in privately issued bonds and recent SEBI orders
In an August 2025 order pertaining to downselling of privately placed unlisted NCDs to 699 investors, the issuer contended that the allotment of NCDs was made to a single investor on private placement basis, and any subsequent transfer of such securities within 6 months from its allotment is an independent action of the investor, with no direction or influence from the issuer. Here, SEBI referred to the legal maxim ‘acta exterior indicant interior secreta’ (external action reveals inner secrets) to rule out the aforesaid contention of the issuer.
In the facts of the said case, the investor (primary subscription) was referred to as Debenture Holder Representative (DHR), and the investor was identified as a depository account of such DHR. The issue related documents indicated the primary subscriber’s intention to downsell, and not to hold investments in the NCDs.
In the said case, while dealing with the concept of “deemed public offer”, SEBI also interpreted the construct of section 25, and observed:
The expression “with a view to” in section 25 indicates the reason or goal behind an action. It signifies the action being taken with a specific objective in mind and implies a forward-looking perspective, suggesting that the action is a means to an end. It is pertinent to mention that such intent, design or reason can be drawn from a mass of factual details and can be gleaned from the whole gamut of surrounding foundational facts and circumstances both poste and ante the typical gambit of allotment in this case.
SEBI also held that:
…(unless the contrary is proved) if it is shown that an offer of the securities allotted or of any of them, for sale to the public was made within six months after the allotment or agreement to allot, it is presumed that the allotment or an agreement to allot the securities was made with a view to the securities being offered to the public and the document whereby the offer for sale is made shall be deemed to be a prospectus under section 25(1).
The order also referred to another adjudication order of SEBI dated 20th September, 2023 (subsequently settled on 10th April, 2024). In the said case, the allotment of NCDs was made in the portfolio demat account of the primary investor, which were subsequently transferred to 355 investors. The application money was also received from the portfolio pool account of the investor, and not the proprietary account. In the facts of the case, the investor had also acted as a structurer of the deal and received an advisory fee from the issuer for the same.
Downselling of privately placed “listed” bonds
Securities, once listed, are freely transferable. There is no lock-in period or transfer restrictions on the listed bonds. Therefore, a question arises on whether the downselling restrictions and deemed public issue implications arise in a case where the NCDs are issued through private placement, and listed on the stock exchanges?
In our view, if the bonds were privately placed, but have been downsold in a quick succession, it is implied that the downselling was a part of the primary issuance. In such cases, the issuer may be said to have violated public issue norms by calling what was really a public offer as a private placement. Thus, if the nexus between primary issuance through private placement and secondary transfer to retail investors is clear, it is substantively a public offer, being camouflaged as a private placement. The impugning issue here is not the sale of a listed security, but claiming the issue to be private placement, though with distribution nexus.
Had the securities been intended to be offered to the public, the same should have been done through “public issue” of such bonds, and not through the “private placement” route.
Downselling of bonds purchased from secondary market
The trigger of deemed public issue norms is not based on the number of stopovers; what is relevant is the intent of downselling to the retail public. For instance, consider a case where the issuer issues bonds to XYZ Ltd, an investor. The investor, in turn, transfers the same to a market intermediary (portfolio manager/ stock broker etc). Now, the market intermediary downsells such bonds to a large number of investors. The proximity of each of the aforesaid events, viz., (a) primary issuance, (b) secondary transfer to intermediary and (c) downselling by intermediary to public – are itself suggestive of the ultimate intent of downselling. Therefore, in such cases as well, the provisions of deemed public issue should apply.
Further, where a registered market intermediary acts as a conduit investor to facilitate such transfers, SEBI may also take action against the same. For instance, In an adjudication order dated 25th April, 2023, SEBI has levied penalty on the registered intermediary (portfolio manager) for having facilitated downselling of privately placed securities in violation of the regulatory requirements. Similarly, in the August 2025 order referred above, while penalty has not been levied on the conduit investor, SEBI observed the following in relation to the role of the conduit investor:
Down-selling of the NCDs cannot entirely be a unilateral and independent act without the involvement of other parties and the entire scheme could not have been possible without the connivance of the parties involved.
Nexus between primary issuance and secondary transfers
Section 25(2) of the Act refers to a time gap of six months between primary issuance and secondary transfer for considering the same as a deemed public issuance. The time period of six months is for the purpose of reasonability of connection between the primary issuance and the secondary sale. Thus, proximity between primary issuance and secondary transfer is one of the factors to be considered.
Sometimes, attending circumstances make it clear that the intent of the intermediary was to downsell. For example, the intermediary may have reached out to the potential investors, sourced their intent to subscribe or actually procured their subscriptions, and then may have made the investment in the bonds. Or, as sometimes seen, there may be an irrevocable intent expressed by the ultimate investors to invest the subject bonds.
Charging of fees, by whatever name called, by the primary investor from the issuer may also indicate that the fees is being charged by the investor for acting as a conduit in the private placement offer of the issuer.
Because the substantive view of the arrangement in its entirety is by connecting the dots together, the view may be subjective, but mostly, it is not difficult to discern.
Limit on number of offerees: each ISIN or each issuer?
Section 42(2) r/w Rule 14 of the PAS Rules provides that an offer or invitation to subscribe securities under private placement should only be made upto 200 investors (excluding QIBs and employees under ESOP) in aggregate for a financial year. Further, an explanation to Rule 14(2) clarifies that the limit would be reckoned individually for each kind of security that is equity share, preference share or debenture. The same is based on the recommendations of the Report of the Companies Law Committee, 2016.
The term “securities” is defined to include “debentures”, however, different series of debentures having different terms of issue, inter alia, nature of security, nature of listing, terms of conversion (OCDs, NCDs etc) does not comprise a separate “kind” of security altogether. ISIN (International Securities Identification Number) of securities is a unique 12-character alphanumeric code that identifies a specific financial security, such as a stock, bond, or mutual fund unit. As such, it is merely a tool of identification of security rather than a determinant of the kind of security. Accordingly, the limit of 200 under the Rule should be reckoned at the issuer level for each type of security and not on ISIN basis.
Sale of privately placed bonds by Online Bond Platform Providers
Offer of NCDs in secondary market transactions are permitted through the registered Online Bond Platform Providers (OBPP), as per Reg 51A of NCS Regulations read with Chapter XXI of the Master Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper. However, the OBPP is required to be registered with SEBI and their services are restricted to only (a) listed bonds and (b) bonds that are proposed to be listed through a public offering.
In case of OBPPs, the concept itself was introduced to facilitate offering of listed debentures, in a controlled and compliant environment. That the lock-in restrictions of six months do not apply in case of sale of bonds through OBPP has been discussed by SEBI in its Board Meeting dated 30th Sep, 2022. Para 3.4.3. of the Board Note provides the rationale, as summarised below:
SEBI already has regulations on issue and listing of privately placed debt securities which inter-alia provides for furnishing of private placement memorandum (which itself is very elaborate), memorandum of association, articles of association, requisite resolutions from the board or committees authorizing such listing of securities on stock exchanges. Once listed, the issuer has to follow all the requirements including detailed disclosures at various intervals. Hence, once the securities are listed, there is not likely to be any circumvention of key public issue requirements. Lock-in requirements, if introduced, may rob the investors from liquidity and the opportunity to exit their investments, if so desired. Debt investors may involve mutual funds or other institutional investors. Restrictions on liquidity can have ramifications which could have large scale implications. Accordingly, the lock-in requirement for listed debts is not proceeded with.
However, it is to be noted that the registered OBPP can deal only in listed or to-be listed securities. The OBPP is not permitted to offer unlisted bonds/ other products either through the same platform or through a separate platform/ website. In this regard, SEBI, in its interim order dated 18th November, 2024, took action against three unregistered OBPPs that facilitated the offering of unlisted NCDs to retail investors.
Circumstances where downselling does not result in deemed public issue
We will want to conclude the write up with some thoughts.
The fact that an issuer cannot market debt instruments to over 200 investors surely cannot mean that at no point of time, the number of investors can exceed 200. While securities of a public company are freely transferable, even if the company is a private company, after listing of the debt securities, the transfers thereafter are largely beyond the control of the issuer. Therefore, the real issue is not the actual number of persons who have invested in the bonds: the real issue is, to how many persons was the issue offered?
Hence, if the nexus between the issuance, and the downselling, is not clear or unambiguous, secondary market transactions do not necessarily hint at the intent of offering to over 200 investors. Even the provision of sec. 25 (2) (a) of the Companies Act is a rebuttable inference – it is capable of being dismissed by contrary evidence. Below, we list out some illustrative situations where it may be possible to contend that the issuer did not make an offer to over 200 investors:
- The primary investor of the bonds makes an offer on OBPP. As discussed above, the same is exempt from the deemed public issue restrictions u/s 25(2)(a).
- There are acquirer/acquirers who have made a genuine investment in the bonds, and after a reasonable time, make a phased exit by downselling the bonds
- A portfolio manager acquires the bonds in the names of various clients, spaced over time, indicating clearly that the acquisition by the PMS clients was not a part of the initial offer.
We do understand the growing debt market in India needs wider investor participation, but there have been instances in the past where the device of private placement was exploited to the hilt. Hence there has to be that delicate balance between regulatory concerns and the need for broadbasing of listed debt, which is why instrumentalities like OBPPs have been permitted.
Our other resources:
Crowdsourcing funds faces stiff penal actions
Resource Centre on Corporate Bonds
Introducing common offer document disclosures for Private Placement and Public Issue