– Understanding Reportable vs Distributable Profits under Ind AS and the Companies Act, 2013
– Sourish Kundu | corplaw@vinodkothari.com
In the sphere of corporate law intertwined with accounting principles, there arises a question on profits that are reported in the financials of a company and the amount that can actually be distributed, that is to say, a company’s reported profits may be impacted by several accounting standards, yet that does not mean it can distribute all of that profit as dividends. Under Indian law and accounting rules, there is a clear distinction between reportable profits (what appears in the financial statements) and distributable profits (what a company is legally permitted to pay out to shareholders). In this article, we decode the difference between reportable profits and distributable profits and the implications of this difference, whether companies are expected to prepare two statements of profit or loss, how investors are expected to read the financials to ascertain what can be expected as dividend.
What are Reportable Profits?
“Reportable profits” refers to the profits (or loss) shown in the Statement of Profit & Loss prepared under Indian Accounting Standards (Ind AS). It includes all recognised items of income, expenses, gains and losses, whether realised or unrealised, so long as they meet the recognition and measurement rules in terms of the relevant accounting standards. For example, under Ind AS 109 (Financial Instruments), paragraph 5.7.1 states that changes in fair value of financial assets or liabilities measured at fair value through profit or loss (FVTPL) must be recognised in the PnL. Similarly, fair-value measurement principles under Ind AS 113 (Fair Value Measurement) apply where other Ind ASs require or permit fair value.
Because reportable profits include unrealised fair value gains, remeasurements, or other accounting adjustments, there is always a possibility of an inflated or deflated picture being painted wherein there is a difference between a company’s “profit” number from the perspective of distribution.
What are Distributable Profits?
“Distributable profits” are that portion of profits (or reserves) out of which a company can legally declare and pay dividends to its shareholders under the Companies Act, 2013. Section 123(1) of the Act states that a company shall not declare or pay any dividend for a financial year except:
out of the profits of the company for that year, after providing for depreciation, and
out of the profits of any previous financial years, after providing for depreciation and remaining undistributed.
The first proviso to section 123(1) further clarifies that unrealised gains, notional gains or revaluation surplus arising from measurement at fair value shall not be treated as realised profits for the purpose of dividend declaration.
“Provided that in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded”
Thus, even though accounting standards allow recognition of such gains/losses in the PnL statement, the law restricts their distribution and ensures distribution can be made of only actual realised profits.
As per the section, following adjustments are required to be made to reportable profits to compute distributable profits
Reportable Profits
XXX
Less:
(b) unrealised gains
(XXX)
(c) notional gains
(XXX)
(d) revaluation of assets (positive)
(XXX)
(e) any change in carrying amount of assets (positive) on measurement at FV
(XXX)
(f) any change in carrying amount of liability (reduction) on measurement at FV
Add:
(a) revaluation of assets (negative)
XXX
(b) any change in carrying amount of assets (reduction) on measurement at FV
XXX
(c) any change in carrying amount of liability (increment) on measurement at FV
XXX
Distributable Profits
XXX
So effectively, it is not the case that companies need to maintain or prepare parallel PnL, one for the accounting purpose and one for the purpose of ascertaining distributable profits, the adjustments as illustrated above needs to be carried out. This is similar to adjustments carried out for the purpose of ascertaining profits in terms of Section 198 of the Companies Act, 2013, which is broadly used for determining CSR expenditure and the limits of managerial remuneration. Interestingly, the treatment of fair value changes in assets and liabilities is akin to how it is treated here, that is, fair value gains are not given credit and hence reversed, and on the other hand, fair value losses are not deducted and hence added back to arrive at the figure out of which managerial remuneration is to be paid, or CSR expenditure is required to be made.
Some examples of such fair value changes and their impact on the reportable and distributable profit figures are given below:
Examples:
Consider the following scenarios for company following Ind AS principles of accounting:
Treatment of FVTPL
Date
Particulars
Value
Reportable Profits
Distributable Profits
July, 2024
Acquisition of investment
Rs. 100
–
–
31st March, 2025
Value of investments
Rs. 150
50 (represents fair value gains routed through PnL)
–
January, 2026
Sale of investments
Rs. 200
–
100 (realised gain)
Deferred Tax Asset
Date
Particulars
Value
Reportable Profits
Distributable Profits
July, 2024
Acquisition of investment
Rs. 100
–
–
31st March, 2025
Value of investments
Rs. 70
-30 (represents fair value loss routed through PnL)
–
Deferred tax asset
Rs. 9 (30% tax on Rs. 30)
9
–
January, 2026
Sale of investments
Rs. 90
–
-10
Why the Difference Exists
The divergence arises because accounting standards and company-law provisions serve different purposes:
The Ind AS framework aims to present true and fair information about an entity’s financial performance and position, which includes remeasurements and accounting for fair value changes.
The company law legislation aims to protect the company’s capital base and ensure dividends are paid out of “real” profits, thereby protecting creditor interests and preventing erosion of capital.
Thus, distributing unrealised or notional gains could expose the company (and its creditors) to risk if those gains reversed. The legal restriction is a form of capital maintenance concept.
Conclusion
In sum: reportable profits (what Ind AS shows) is not always the same as distributable profits (what a company can legally pay out). The presence of items such as unrealised fair-value gains, which are recognised in profit but not “realised” and hence, not available for distribution under company law, creates this difference. Understanding this distinction is essential because in the end, the dividend cheque flows only from the legally distributable pool and not simply from what the profit and loss account might suggest.
– SC reinforces the distinction between ‘debt’ and ‘share capital’ for the purpose of IBC
– Sourish Kundu | resolution@vinodkothari.com
Introduction
The Supreme Court in a recent judgement in the matter of EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited, has categorically clarified that holders of Cumulative Redeemable Preference Shares (“CRPS”) are classified as investors rather than creditors (more specifically, financial creditors) and are therefore not entitled to file for insolvency under Section 7 of the IBC, since non-redemption of these shares do not qualify as a “default” under the Code.
The findings of the SC in EPC Constructions judgement resonate with our views as explained in the article. However, we delve deeper into the aspect with analysis of the ruling as below, as to on what basis it was concluded that preference shares cannot be considered as ‘debt.
Brief facts of the case
The appellant entered into a contract for construction of a fertilizer complex with the respondent, pursuant to which certain amounts became due and payable by the respondent to the appellant, The receivables under the contract was converted into NCRPS, and such conversion was duly approved by the respective boards. Eventually, in course of certain events, the appellant filed a Section 7 petition against the respondent, on account of failure to pay the redemption amount on account of maturity of CRPS. The application was dismissed by NCLT, and then NCLAT on grounds that the CRPS cannot be termed as debt. The application then came for appeal before SC.
Below is a discussion highlighting the rationale for which dues pertaining to preference shares were not held to be financial debt.
Actions speak about “intent”: Conversion of receivables into CRPS conclusive of intent
It was contended by the Appellant that the true nature of the transaction should be unveiled in order to determine whether such preference shares should be treated as debt or not. The fact that there were outstanding receivables, which had become due and payable, the Appellant argued that conversion of the same into preference shares was in a way ‘subordination of debt’, i.e. debt which is having lower priority than other debt in terms of payment, and was with the objective of maintaining the debt-equity ratio. As clear from the communication between the parties, the CRPS merely acted as a temporary tool for borrowing, providing Matix “a pause point” under the arrangement entered by way of exchange of emails. Therefore, the substance of the transaction should be given weightage, and an expansive interpretation of the term “commercial effect of borrowing” should be applied, as was interpreted by the Apex Court while classifying home buyers as FCs.[1] In fact, the SC, in another matter[2] delved into the real nature of a transaction while determining whether a debt is a financial debt or an operation debt.
On this, the Court noted that the preference shares were issued upon conversion of outstanding receivables. The board of the preference shareholder exercised its commercial wisdom in accepting the shares, given the low recovery prospects. Therefore, what was actually a financial debt, extinguished owing to such conversion, and hence the appellant cannot pose as a financial creditor.There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding[3]. The SC, therefore, remarked:
“There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding. The egg having been scrambled, . . . attempt to unscramble it, must necessarily fail.”
Debt vs. preference shares: Redeemable preference shareholder not a creditor
The SC placed reliance on the relevant provisions of the Companies Act, particularly Sections 43, 47, and 55, and held that preference shares form part of the company’s share capital and not its debt capital. Consequently, preference shareholders cannot be treated as creditors, nor can they initiate insolvency proceedings under Section 7 of the IBC, which is reserved for financial creditors.
The Court noted that –
“It is well settled in Company Law that preference shares are part of the company’s share capital and the amounts paid up on them are not loans. Dividends are paid on the preference shares when company earns a profit. This is for the reason that if the dividends were paid without profits or in excess of profits made, it would amount to an illegal return of the capital. Amount paid up on preference shares not being loans, they do not qualify as a debt.” (Emphasis added)
Dividends on preference shares are payable only out of profits or proceeds from a fresh issue of shares for redemption. Thus, only a profit-making company can redeem its preference shares, as profits accrue after all expenses, including interest on borrowings. To suggest that preference shareholders become creditors upon default, even when the company has no profits, would distort this basic principle. [4] As aptly stated in “Principles of Modern Company Law”[5]:
“The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this constraint; and that the debt holder will rank before the preference holder in a winding-up.”
In the context of a CIRP, initiation under Section 7 requires a “default”, a debt that has become due and payable. The Supreme Court observed that since preference shares are redeemable only out of profits or fresh issue proceeds, no “debt” arises unless such conditions exist; consequently, there can be no default under Section 7.
Difference between preference shareholder and a creditor was concisely captured in “A Ramaiya’s Guide to the Companies Act”[6]:
“It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding-up. In Lalchand Surana v. Hyderabad Vanaspathy Ltd., (1990) 68 Com Cases 415 at 419 (AP), where a preference shareholder was denied redemption in spite of maturity, he was not allowed to file a creditor’s petition for a winding-up order under s. 433(e) of the 1956 Act. An unredeemed preference shareholder does not become a creditor.”
A financial debt necessarily involves disbursal against the consideration for time value of money, typically represented through interest.[7] While interest may not be a sine qua non in every case[8], there must at least be an element of consideration for the time value of money. In the present case, no such disbursal or consideration existed and hence, the claim failed to meet the threshold of a financial debt.
As such, preference shares do not fall within the ambit of “financial debt” under Section 5(8)(f) of the Code, and equating them with financial creditors would distort the fundamental distinction between shareholders and creditors[9].
Whether accounting entries/recognition as “liability” would make a difference
It was contended that financial debt is an admitted liability in the books of accounts of Matix.
However, the SC[10], held the treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties as reflected in the documents executed by them. Further the IBC has its own prerequisites which a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resort to the treatment in the accounts this case cannot be decided.
Our Analysis
While the judgment firmly settles that preference shareholders cannot be treated as creditors, since shares represent ownership and not loans, the question often arises why such instruments, though debt-like in spirit and accounting treatment, are not “debt” under law. The rationale goes beyond mere nomenclature.
Ind AS 32 [Para AG25 to AG28] clarifies that in determining whether a preference share is a financial liability, or in other words, a debt, or simply an equity instrument, the shares has to be assessed against the rights attached to it, and whether it signifies a character of financial liability. In other words, if a preference share is redeemable at a specific date in the future at the option of the shareholder, such instrument carries a financial liability and is treated as such. However, it should be noted that every law has to be read in a given context. Treatment under accounting standards is more from the perspective of the financial position of the issuer. However, in case of IBC, the question is of rights – as a creditor will have right to file an application under section 7, but a shareholder will not have such right; similarly, a creditor will have a higher priority under section 53, while a shareholder stands in the lowest step of the priority ladder.
Therefore, the context in which accounting standards operate cannot be superimposed while interpreting the rights and liabilities under laws like the Code. Therefore, preference shares, depending on their terms of issuance may be classified as a liability for the purpose of complying with accounting principles, however, that cannot be said to be confer such preference shareholders the status of a creditor, and consequently, entitling them to file CIRP application under the Code.
Hence, there is a fundamental difference between “debt” and “shares” – a “debt” once converted into “shares”, moves from one end of the spectrum to another, and cannot retain its original nature and rights under the Code.
[1] Pioneer Urban Land and Infrastructure Ltd. and Another v. Union of India and Others ((2019) 8 SCC 416)
[2] Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt Ltd and Anr. (2024 SCC OnLine SC 649)
[3] Commissioner of Income Tax v. Rathi Graphics Technologies Limited (2015 SCC OnLine Del 14470), where it was held that, where the interest or a part thereof is converted into equity shares, the said Interest amount for which the conversion is taking place is no longer a liability.
[4] Lalchand Surana v. M/s Hyderabad Vanaspathy Ltd. (1988 SCC OnLine AP 290)
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-11-03 12:19:082025-11-03 17:08:02Redeemable preference shares not debt under IBC
Regulatory reforms to ensure EoDB for Debenture Trustees are being discussed and implemented in phases since January, 2025. SEBI proposed amendments with respect to permissible activities of DTs, the manner of utilisation of Recovery Expense Fund, specified rights of DTs with corresponding obligations on issuers and introduction of a model debenture trust deed through a consultation paper (‘CP’) dated November 04, 2024, which were deliberated in its meeting held on December 18, 2024, and finally approved the revised proposals on June 18, 2025.
In this article, we have discussed threadbare the regulatory changes approved in June 2025 and notified in October, 2025 by SEBI and actionables arising therefrom for issuers & DTs, pursuant to amendments made in SEBI (Debenture Trustee) Regulations, 1993 (‘DT Regulations’), SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) that become effective from October 27, 2025 for DT Regulations and LODR Regulations and October 28, 2025 for NCS Regulations. The 2nd tranche of amendments approved by SEBI are notified by three circulars issued on November 25, 2025 relating to terms and conditions for undertaking permissible activities by DTs (SEBI Circular 1), utilisation of Recover Expense Fund (SEBI Circular 2) and timelines for submission of details by issuers to DTs (SEBI Circular 3).
Permissible Activities for DTs [newly inserted Reg. 9C in DT Regulations and SEBI Circular 1]
Key issue:
SEBI primarily governs DTs through DT Regulations, which presently do not restrict DTs to undertake any activities. However, based on the revenue data of the top 5 DTs, SEBI raised a concern that DTs presently undertake other trusteeship activities, which are either regulated by other Financial Sectors Regulators (FSR) like (securitisation trustee, security trustee, public deposit trustee) or not expressly regulated by any authority (outside purview of SEBI such as being an escrow agent, facility agent, monitoring agent, trustee for unlisted NCDs), thus creating potential regulatory and systemic risks. Another limitation is that SEBI cannot effectively address investor grievances or issues arising from such unregulated activities.
Proposal:
SEBI proposed to allow DTs to undertake such activities (not regulated by SEBI) which are governed by any Financial Sector Regulator (FSR). However, any other unregulated activities are required to be hived off to a separate legal entity within 1 year. However, later on SEBI dropped the proposal of hiving off in its meeting in December 2024.
Present Amendment:
Fig 1: Activities permitted to be carried on by DTs
With respect to the term ‘Separate Business Unit’ (SBU) though not defined in the amendment, a reference can be drawn from the SEBI Board Agenda (Para 3.7.3.), now notified in SEBI Circular 1, which states that DTs shall undertake activities not regulated by SEBI through one or more Separate Business Unit of the DT, segregated by a Chinese Wall and ring-fenced from the SEBI regulated activities. This seems like a relaxation for the DTs, where permitted activities can be housed under one entity but only in different segments/ divisions, compared to the initial proposal of hiving off to a separate legal entity.
A timeline of 6 months from the date of notification (i.e by April 27, 2026) has been provided to transfer permitted activities to a separate business unit.
Another major restriction which Reg. 9C (1) provides, is a prohibition on RBI-regulated entities to undertake DT activities. DTs which are also RBI-regulated are mandated to carry out activities of DT through a separate business unit only.
Additionally, Reg. 9C(2) mandates DTs to ring-fence the net worth stipulated in DT Regs. (Reg. 7A) to ensure that it remains insulated from any adverse impact arising from undertaking other activities by DT.
SEBI Circular 1 lists out the conditions imposed on DTs to carry out activities not regulated by SEBI:
Fig 2: Conditions on DTs for carrying out activities not regulated by SEBI
Standardisation of Debenture Trust Deed (‘DTD’) format
Key issue:
Extant regulatory framework viz. Reg 18 of NCS Regulations and Reg 14 of the DT Regulations do not provide for a standard format of DTD. Instead, the provisions indicate the mandatory contents of DTD as prescribed under section 71 of the CA, 2013 read with rule 8 of Companies (Share Capital and Debenture) Rules, 2014 and form SH-12. Due to this, DTDs were observed to have different contractual terms and their documentation varied from issuance to issuance. Hence, a standardised format was necessary for market optimisation, which is flexible enough to accommodate commercial understanding amongst the parties.
Proposal:
In light of the concerns discussed above, Industry Standards Forum – Debt (ISF Debt), proposed four model DTDs categorised as secured public issue, unsecured public issue, secured privately placed issue and unsecured privately placed issue. Model DTD in case of secured NCDs was provided in the CP (broadly divided into 4 parts- see fig 2 below).
Fig 2. Indicative bifurcation of DTD as proposed in annex- 1 of the CP.
Present Amendment:
While the model DTD is yet to be notified, SEBI has rolled out the enabling amendments in DT Regulations and NCS Regulations. As a result, the erstwhile requirement of having DTD in 2 parts viz.“Part A containing statutory/standard information pertaining to the debt issue; and Part B containing details specific to the particular debt issue” is done away with.
In case the issuer intends to deviate from the to be notified format of DTD, DTs may permit, subject to disclosure of a key summary sheet of deviations along with the rationale in the offer document of NCDs (GID/ KID/ shelf prospectus).
Utilisation of Recovery Expense Fund (‘REF’)
Key issue:
Reg. 11 of NCS Regulations mandates issuers of NCDs to create REF with the stock exchanges to enable the DT to take prompt action for enforcement/legal proceedings in case of ‘default’. The existing framework (Chapter IV of Master circular for Debenture Trustees) only lists out the illustrative expenses (legal expenses, cost for hosting meetings etc) and not the explicit list of eligible expenses. Since, DTs require prior consent of debenture holders to utilise REF funds, the absence of a clear expense list often leads to delays and difficulties in obtaining approvals and reimbursements.
Proposal:
SEBI proposed to provide an indicative list of eligible expenses for utilisation of REF (refer CP). Additionally, for eligible expenses, a mere intimation to the debenture holders would be sufficient to utilise REF. However, for other expenses, prior approval is still required. DTs will also be required to furnish a certificate from the auditor (format is yet to be notified) to the stock exchanges w.r.t eligible expenses to claim from REF.
Newly inserted Reg. 15A(3) in the DT Regs allows DTs to utilise REF in the manner specified by SEBI. Manner of utilisation and other conditions, as approved by SEBI above, have been notified by SEBI Circular 2, which has the effect of modifying Chapter IV of Master Circular for Debenture Trustees. .
As per the said circular, the following expenses can be reimbursed from REF without obtaining prior consent from debentureholders. However, DTs shall intimate debenture holders through mail and upload the details of reimbursement from REF on its website.
Expenses related to enforcement/ legal proceedings
Voting process
Holding of meeting of debenture holders
Filing court applications
Legal fees
Expenses for asset recovery services
Appointment of legal consultants for enforcement/ legal proceedings
Any other expenditure may be claimed only with the prior consent of the debenture holders followed by intimation thereof to the designated stock exchange.
Further, in both the cases, the DT is required to submit an independent auditors’ certificate regarding the expenses incurred to the designated stock exchange for its verification. The amount shall be released from the REF only after verification of the said certificate.
Issuers to furnish information to DTs [Reg. 56 of LODR]
Key issue:
Certain compliance obligations are bestowed upon DTs with express timelines, for which DTs rely on the information provided by the issuers. However, corresponding responsibility, in respect of such compliances, has not been explicitly established for the issuers.
Proposal:
To specify the timeline for issuers to furnish information to the DT as per Reg. 56 of LODR Regulations to enable the DTs to keep a track of the status of compliances by the issuer and make necessary timely compliances as applicable to them.
Reg. 56 of the SEBI Listing Regulations is amended to provide a timeline of 24 hours from the occurrence of the event or information, within which issuers are required to furnish information to the DTs.
Additionally, SEBI circular 3 has provided for the timelines for submission of the following reports / certificates by the issuer to the DTs (note that para 1.2 of chapter VI of DT Master Circular has specified the timelines for similar reports / certificates to be furnished by DTs to the recognised stock exchange). The timelines are applicable from the quarter ended December 31, 2025.
Security Cover certificate
Under the extant regulatory framework, DTs are required to monitor security cover maintained by the issuer in pursuance of regulation 15(1)(t) of the SEBI DT Regulations on a quarterly basis. Additionally, DTs are also required to obtain a certificate from the statutory auditor of the issuer on a half yearly basis and furnish the same to the stock exchange. Pursuant to para 1.2 of chapter IV of DT Master Circular, DTs are required to furnish the same to the stock exchange within 75/90 days from end of quarter
Similar obligations are imposed on issuer under the Listing Regulations, where issuer is required to furnish security cover certificate u/r 54 along with the submission of financial results within 45/60 days from end of quarter (as per Reg. 52) Issuer is required to furnish the security cover maintenance certificate provided by the statutory auditor and compliance with covenants to the DT on a half yearly basis along with submitting financial results u/r 52 to the DTs within 24 hours from occurrence of event/ receipt of information. [reg 56(1)(d) of Listing Regulations and para 5.5 of chapter III of DT Master Circular].
Vide this SEBI Circular 3, SEBI has prescribed the timeline of 60/75 days from end of quarter for furnishing security cover certificate to the DT for further submission to stock exchanges. While the idea of this circular was to impose corresponding obligations on the issuer to submit necessary documents to DT, the issuers were already under the obligation to provide a security cover certificate to DTs within the timelines prescribed in Reg. 54 & 56.
Evidently, Listing Regulations have a relatively stricter timeline on the issuers for furnishing the security cover certificate to the DT, which has to be complied with irrespective of the new timelines so prescribed.
Other reports / certificates
Reports/ Certificate
Periodicity/timeline specified for the issuer in SEBI Circular 3
Periodicity/timeline specified for the DTs in the Master Circular
A statement of value of pledged securities
Quarterly basis 60 days – end of quarter 75 days – end of last quarter
Quarterly basis 75 days – end of quarter 90 days – end of last quarter [Para 1.2 of chapter VI of the DT Master Circular]
A statement of value for Debt Service Reserve Account or any other form of security offered
Net worth certificate of guarantor (in case debt securities are secured by way of personal guarantee)
Half yearly basis 60 days – end of each half-year
Half yearly basis 75 days – end of each half-year [para 1.2 of chapter VI of DT master circular]
Financials/value of guarantor prepared on basis of audited financial statement etc. of the guarantor (secured by way of corporate guarantee)
Annual basis 60 days – end of each financial year
Annual basis 75 days – end of each financial year
Valuation report and title search report for the immovable/ movable assets, as applicable.
Once in three years 60 days – end of the financial year
Once in three years 75 days – end of the financial year
It is to be noted that till now, the issuers were not expressly mandated by law to furnish the reports / certificates mentioned in point B above to the DT, but were still providing the same as per the terms specified in DTD. The issuers are obligated to furnish the above certificates / reports within the aforestated timelines.
Conclusion
This amendment, though focused on EoDB, has placed an enhanced responsibility on the DTs and issuers to ensure timely compliance. DTs are now required to conduct non-SEBI regulated activities through separate business units while keeping their net worth protected from any adverse impact and segregating the records and resources from the SEBI-regulated activities. A relaxation is also provided for claiming eligible expenses from REF without prior approval of the debenture holders.
Another highlight of the amendment is the introduction of model DTD, requiring issuers to disclose any deviations with proper justification in the offer document. However, the same is yet to be notified.
Also, disclosures by issuers to DTs are now time bound where items u/r 56 of Listing Regulations are to be provided within fixed timelines of 24 hours and other reports/ statements within defined timelines & periodicity.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-11-03 11:46:332025-11-28 11:48:46A MIX OF EASE AND BURDEN: SEBI’s latest regulatory push redefines the role of DTs and issuers
Co-lending is an arrangement where two or more regulated entities (REs) jointly extend credit to a borrower under a pre-agreed Co-Lending Agreement (CLA). The CLA, signed before origination, defines borrower selection criteria, product lines, operational responsibilities, servicing terms and the proportion in which each lender will fund and share the loan. The aim is to combine the origination strength of a RE with the lower cost of funds of another RE, thereby expanding credit outreach.
Before the issuance of the RBI (Co-Lending Arrangements) Directions, 2025 (‘Directions’), there was no formal co-lending framework for non-PSL loans and for PSL loans, the CLM-2 ‘originate-and-transfer’ model was the most common structure. Under this model, the originating RE would book 100% of the loan in its books and, within a stipulated period, selectively transfer a portion to the funding partner. This post-origination discretion enabled ‘cherry-picking’ of loans. CLM-2 mirrored a loan sale under TLE framework but without any minimum holding period restrictions, making it a preferred route. It offered the economic and accounting benefits of transfer, including derecognition and upfront gain recognition without waiting for loan seasoning.
Upon transfer, the originating RE would derecognise the transferred portion and book ‘upfront gains’. The upfront gain arose from the excess spread between the interest rate charged to the borrower and the yield at which the loan pool was transferred to the funding partner. For example, if the originating RE extended loans at 24% and sold down 80% of the pool at 18%, the 6% differential represented the excess spread. This spread, which would otherwise have been earned over the life of the loan, was discounted to present value and recognised as gain on transfer upfront, at the time of derecognition. This led to the originating RE recognising profits immediately despite not receiving any actual cash on the co-lent loans. This practice allowed originating REs to show higher profits upfront, even though no cash had actually been received on the co-lent loans.
The Directions fundamentally alter this framework as well as the prevalent market practice. They move away from originate-and-transfer and institute a pure co-origination model. It has been expressly stated that The CLA must now be executed before origination, with borrower selection and product parameters agreed ex ante. The funding partner must give an irrevocable commitment to take its share on a back-to-back basis as loans are originated. Importantly, the 15-day window provided under the Directions is only for operational formalities such as fund transfers, data exchange and accounting. It is not for evaluating or selecting loans after origination. If the transfer does not occur within 15 days due to inability, not discretion, the originating RE must retain the loan or transfer it under the securitisation route or as per Transfer of Loan Exposure framework. In short, post-origination cherry-picking is no longer permitted.
This change has direct accounting consequences. Under Ind AS 109, a financial asset is recognised only when the entity becomes a party to the contractual provisions and has enforceable rights to the underlying cash flows (see para 3.1.1 and B3.1.1). In a co-lending transaction under the Directions where co-origination is a must, each lender should recognise only its respective share of the loan at origination. The originating partner should not recognise the funding partner’s share at any stage, except as a temporary receivable if it disburses on behalf of the funding partner. Since the originating partner never recognises the funding partner’s share (except as a servicer), there is no recognition and therefore, there is no question of any subsequent derecognition and booking of any gain on sale. Income, if any, is limited to servicing fees or mutually agreed charges, not upfront profit.
By eliminating post-origination discretion, RBI has closed the upfronting route. Co-lending is now truly co-origination, joint funding from day one, with proportionate recognition and no accounting arbitrage. The practice that once allowed REs to accelerate income has been uprooted.
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Designated persons, being insiders with regular privileged information flow, cannot be doing what other investors can do. Several option trades may be devices to skim short term swings in share prices. can designated insiders do these? This interesting question, mostly ignored in Indian corporate practice, is explored in this article.
Derivatives trading is becoming increasingly popular in India, including amongst the retail investors. A recent address by SEBI’s Chairman urges the retail investors to assess their risk capacity while dealing in derivatives and avoid speculative trades. A July 2025 study by SEBI on trading activity of investors in Equity Derivatives Segment (EDS) indicates a relatively very high level of trading in EDS, as compared to other markets, particularly in index options. Further, within EDS, options segment (in premium terms) has shown growth at the fastest rate with average daily premium traded growing at the CAGR of 72% for index options and 54% for single stock options.
Given the large volumes of derivatives trading, in addition to the concerns on loss of investor’s money (nearly 91% of individual traders incurred net loss in EDS in FY 2025), it is also important to examine the concerns which would arise from an insider trading perspective. Pertinent questions would be whether derivatives trading also comes within the purview of insider trading, and if the answer to this is yes, whether it will also attract the prohibition around contra-trade, where the market participants bet on the short-term future value of the underlying assets to make a profit.
This article examines the aforesaid questions in the light of extant laws, and global position.
Prohibition on insider trading
The prohibition on insider trading comes from Section 12A of SEBI Act –
“No person shall directly or indirectly—
(d) engage in insider trading;”
Reg. 4(1) of PIT Regulations applicable universally to all insiders, also puts a blanket prohibition on trading when in possession of UPSI:
“No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
Para 4 of Schedule B (model CoC for listed entities) specifically pertains to trading by Designated Persons (DPs). They can trade subject to compliance with the Regulations – which provide for monitoring through the concept of “trading window” that is, during which a DP can be reasonably expected to have access to UPSI. Therefore, at such times, the trading window is closed, and the DP cannot trade in securities of that company. When the trading window is open, trading can take place after getting pre-clearance from the Compliance Officer.
In case of a fiduciary, the monitoring happens through a grey list. The concerned persons have to take preclearance from the Compliance Officer. Here, trading restrictions are applicable for securities of such listed companies, for which the person/s is/are acting as fiduciary.
Derivative trading vis-a-vis insider trading norms in India
Prohibition on derivative transactions under 1992 Regulations
“4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.”
Thus, under the 1992 Regulations, there was a complete and explicit prohibition on derivative transactions for designated employees. Note that the ban was for “any time” and not restricted to only while in possession of UPSI.
Position under the 2015 Regulations
While the contra-trade restrictions have been retained in the existing (2015) Regulations, the provision explicitly calling for blanket prohibition on derivative transactions was omitted. The Sodhi Committee Report does not contain any specific discussions in this regard.
Nonetheless, derivatives, qualifying the definition of “securities”, continue to be covered by the insider trading regulations. Reg 6(3) of the 2015 Regulations specifically refers to trading in derivatives, for the purpose of disclosure of trading in securities.
The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this Chapter.
As regards the value of derivatives for such disclosures, the same refers to the “traded value” of the derivatives. The format for such disclosures, as specified in the SEBI Master Circular on Surveillance of Securities Market (Annexure – I), also refers to disclosure of trading in derivatives on the securities of the company, and requires calculation of notional value of options based on premium plus strike price of the options.
Further, trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular].
Whether the immediate relative of the designated person can trade in the derivatives of the company?
Answer
Yes. Designated person and its immediate relative can trade in derivatives when not in possession of UPSI and such trades are accordingly governed by the code of conduct.
Thus, the following points may be noted –
A person cannot undertake insider trading in securities – directly or “indirectly”. Derivatives are defined under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956.
“Derivative”—includes
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central Government to be derivatives;
Therefore, trading in derivatives may technically tantamount to trading in underlying securities – indirectly. This is irrespective whether the transaction results in actual delivery or is only net-settled in cash.
The definition of “securities” includes derivatives – hence, there should not be any confusion as to why trading in derivatives of the underlying securities should be excluded from the scope of “trading”
Chapter III of PIT Regs. which is applicable to all insiders (note, that DPs are closest insiders), explicitly says that trading in securities includes trading in derivatives.
SEBI FAQ (Q. 52 above) makes it clear that trading in derivatives is only possible when the DP/ immediate relative is not in possession of UPSI[1]. Of course, whether or not the DP/immediate relative is having possession of UPSI or not, is to be seen at the time the trading is proposed to be done.
Therefore, what is clear is that unlike the 1992 Regulations, there is no explicit provision calling for blanket prohibition on the derivative transactions by DPs and their immediate relatives. However, restrictions as are applicable otherwise in relation to securities of a listed company, would also apply to derivatives having such securities as underlying. Of course, the restriction is not a blanket prohibition as was in 1992.
In simple terms, a derivative should be treated no differently than the underlying security itself. Consequently, in view of the author:
When the trading window is closed, a DP should not be allowed to enter into a derivative in securities as well.
When the trading window is open, trading in derivatives should be subjected to preclearance.
The above position is also apparent in other jurisdictions, where, in the context of insider trading norms, dealing in derivatives is equivalent to dealing in underlying securities.
Once it is clear that trading in derivatives is equivalent to trading in underlying security, then it is obvious to conclude that trading in derivatives will also be governed by contra-trade prohibition in the same manner as trading in the underlying itself. See detailed discussion below.
Issues concerning contra-trade
Rationale for prohibiting contra-trade
The insider trading norms around the world prohibit contra trade or short swing trades by the persons privy to or likely to be privy to unpublished price sensitive information (UPSI) about the listed securities. The SEBI (Prohibition of Insider Trading) Regulations, 2015 restricts the Designated Persons (DPs) and their immediate relatives from undertaking reversal trades, within six months from undertaking the previous trade transaction. The intent is to prevent the abuse of UPSI by making short-term profits through unfair means.
The 2008 Consultation Paper states, “It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not.”
Hence, whenever there is a contra-trade within a short span of time (6 months), there is a presumption that the said trade is based on some “superior” access to information – as such, contra-trades are simply prohibited. The DP cannot undertake a contra-trade even if it is contended that he does not have UPSI.
Contra-trade in case of derivatives
Naturally, a question arises on whether DPs can trade in derivatives, and if so, when does the same qualify as contra-trade or otherwise, and the consequences that follow. Let’s take a simple illustration – Mr. A, a DP of X Ltd. purchases 100 shares of X Ltd. on 1.11.2024. Then purchases a put option on 15.11.2024, for all 100 shares. On 01.02.2025, on maturity of the put option, A exercised the put option and sold all the 100 shares. All these transactions, as one would note, are happening within a period of 6 months. The question is – whether A was allowed to undertake the 2nd transaction of purchasing a put option within 6 months of the 1st transaction.
There is a question appearing in SEBI FAQ, as follows:
37.Question
In case an employee or a director enters into Future & Option contract of Near/Mid/Far month contract, on expiry will it tantamount to contra trade? If the scrip of the company is part of any Index, does the exposure to that index of the employee or director also needs to be reported?
Answer
Any derivative contract that is physically settled on expiry shall not be considered to be a contra trade. However, closing the contract before expiry (i.e. cash settled contract) would mean taking contra position. Trading in index futures or such other derivatives where the scrip is part of such derivatives, need not be reported.
This question above clearly deals with treatment of expiry of a derivative contract or settlement of a derivative contract as to whether those events would be treated as contra-trade. That is, a culmination of a derivative contract, resulting in the delivery of the underlying will, of course, not amount to a separate “trade” – therefore, there is no question of a contra-trade. On the other hand, where no physical delivery is taken, rather, settled in cash (payment of the difference between the contract’s entry price and market price at expiry), the same amounts to a “sell” trade, thereby, a reversal of the position of the DP. Thus, where the contract is proposed to be settled prior to expiry, it would result in a different transaction/trade – thus, it should be treated as a contra-trade.
Now, if seen in a practical context, in India, the validity of derivatives contract would usually be less than 6 months (typically 1-3 months[2]). And, typically, these derivative transactions in such cases are net-settled before expiry, rather than culminating in actual delivery of securities[3]. Options enable the investors to speculate in shares of higher values and volumes as compared to the cash segment since the only amount payable would be the premium and the net difference in the strike price and spot price later on. Further, cash settlement in derivatives provides a higher leverage to the trader.
In the above scenario, there will always be a higher possibility of a contra-trade. The illustrations below explain the same:
S. No
Transaction
Remarks (assuming T1 and T2 happen within a period of 6 months)
1
T1 – Buy call option T2 – Cash settlement
Contra trade. Buying call option is equivalent to a “buy” transaction. Subsequent cash settlement indicates a “sale” transaction.
2
T1 – Buy call option T2 – Physical settlement
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, subsequent physical settlement only results in delivery of such shares.
3
T1 – Buy call option T2 – Expiry of option on account of out-of-the money
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, however, did not result in delivery on account of the strike price > market price at the time of expiry.
2
T1 – Sell call option T2 – Cash settlement
Contra trade. Selling call option is a “sale” transaction. Cash settlement indicates a “buy” transaction.
3
T1 – Buy put option T2 – Cash settlement
Contra trade. Buying put option is a “sale” transaction. Not taking physical delivery of the shares and carrying out cash settlement indicates a “buy” transaction.
4
T1 – Sell put option T2 – Cash settlement
Contra trade. Selling put option is a “buy” transaction. Cash settlement is deemed to be a “sale” transaction.
As such, trading in derivatives would be much more vulnerable to chances of insider trading, than actual trading in securities. Hence, it becomes extremely important to put mechanisms in place to ensure that derivatives trading be subjected to enhanced restrictions and controls, as suggested below.
Enhanced safeguards in respect of derivative transactions by DPs
It is quite clear that a derivative transaction that results in cash settlement construes a contra-trade. On the other hand, where physical delivery is taken (although it is not very common to close a derivative contract in physical settlement), the derivative transaction is not considered as a contra-trade (although the same is also to be matched against the previous trade in cash segment). Therefore, in order to ensure that the trade does not result in contra-trade, it is essential that the derivative is either settled by delivery or simply expires on the maturity date, and that there is no cash settlement.
In order to ensure this, in case of purchase of options (put/ call) by the DP, pre-clearance may be provided by the Compliance Officer subject to receipt of a declaration that the DP shall necessarily undertake physical settlement of such trades at the maturity date. Of course, there would be no concerns in case of an out-of-the money option, that is, where prior to the expiry of the contract, the market price remains below the strike price. An out-of-the money option does not result in any profits in the hands of the option holder, however, prevents additional loss in the face of exercising an option where the strike price at which the option is exercised and shares are acquired is higher than the current market price at the time of such exercise of option (upon maturity of the contract).
On the other hand, in case of sale of options (put/ call) by the DP (that is, where the DP is the writer of the option), the physical settlement cannot be guaranteed by the DPs, and chances of contra-trade are higher, as the counterparty (that is, buyer of the option) may choose to have cash settlement before the expiry of the derivative contract. Therefore, in order to obviate the possibility of a contra-trade happening, it might be necessary to completely prohibit sale/writing of options by DPs. This prohibition may be enabled through the code of conduct. . In fact, it is seen that several large listed companies have put a blanket prohibition on derivative transactions by DPs and their immediate relatives.
Contra-trade where there is a preceding/succeeding trade in securities
Besides, this FAQ does not deal with a scenario where a DP who has traded in securities already, now proposes to enter into a derivative contract within a span of 6 months from the date of original contract.
However, one thing is clear from this FAQ – the very entering into the derivative contract (and not expiry/maturity thereof) has been considered to be a trade by SEBI. Also, as discussed in the first part of this article, trading in derivatives should be considered as trading in securities itself. As such, if there has been a trade in securities, and there is a subsequent trade, although in derivatives of those very securities, it would result in contra-trade. That is, if in the above example, A enters into a “put option” – then he will have the right but not the obligation to “sell” the underlying shares, within 6 months of buying the shares. Whether to actually “sell” or have a concrete “right to sell” at a future date at or above a given price – it is nothing but a clear case of “contra-trade”.
For instance, assume a DP purchases shares of the listed company on 1.1.2025. Subsequently, on 1.3.2025, the DP purchased a put option. The put options, akin to a sale transaction, results in contra-trade when matched against the previous “buy” transaction in the cash segment, within a gap of less than 6 months between the two transactions. Similarly, where a call option is bought within 6 months of a previous sale transaction, the same results in contra trade.
Compliances in relation to trading in derivatives by DPs
(1) Appropriate mechanisms in the Code of Conduct
Prior to making trades in the derivatives, it is important for the DP to ensure that the Code of Conduct does not prohibit such trades. Unless expressly prohibited, the Code of Conduct may contain necessary clauses as discussed above, in order to enable derivative trading by DPs, subject to enhanced controls on the same.
(2) Manner of identification of derivative trades
The trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular]. Hence, an instance of contra trade through derivative instruments is easily identifiable by the Compliance Officer.
(3) Pre-clearance for the purpose of trading
Not all trades of DPs are pre-cleared by the Compliance Officer. The pre-clearance is required only for such trades that exceed the thresholds provided in the CoC of the respective listed entity, generally Rs. 10 lacs or more. Here, the value of trade becomes important, and cannot be just limited to the premium payable/ receivable at the time of purchase/sale of such contract. The price of the securities is also relevant. Pre-clearance may be granted by the Compliance Officer, subject to such conditions and undertaking as suggested above.
(4) Trading during closure of trading window
The DPs cannot trade in the derivatives of a company’s securities during the trading window closure period. In order to ensure the trades are not done during the trading window closure period, the concept of freezing of PAN has been introduced – both at the level of the DP as well as their immediate relatives (see an article here). However, the freezing of PAN is applicable only to the quarterly TW closure pending announcement of financial results.
The DP to ensure that neither him, nor his DPs trade in the derivatives of the company during the closure of trading window period.
(5) Reporting of trades in derivatives
As regards the reporting of trade in derivatives, the SEBI Master Circular provides guidance on calculation of notional value of trades, to be calculated based on premium plus strike price of the options. The disclosure of trades are primarily system-driven, based on the PAN details of the DPs updated with the designated depository. Having said that, in case of trades of the immediate relatives of the DPs, or where the PAN details are not updated with the depository, manual disclosures are required for such trades.
(6) Consequences of violation – disgorgement of profits and penal actions
A breach of contra trade restriction leads to disgorgement of profits made and its remittance to SEBI for credit to IPEF. Here, the question arises on what is considered the value of profits for disgorgement to IPEF, in the context of derivatives.
Where the transaction pertains to ‘sale’ of options, the profits would usually be the premium earned by the seller of options. On the other hand, in case of ‘purchase’ of options, the profits should be the difference between the buy and sale value, net of other expenses in connection with such option contracts.
Guidance may also be taken from 17 CFR § 240.16b-6(d) of the SEC Act, which states that the amount of profit shall be calculated as the profits that would have been realized had the subject transactions involved purchases and sales solely of the derivative security valued as of the time of the matching purchase or sale, and calculated for the lesser of the number of underlying securities actually purchased or sold. The amount of such profit shall not exceed the premium received for writing the option.
In addition to disgorgement of profits, penalty may also be levied. For instance, in an adjudication order dated 29th April 2022, the purchase and sale of options on consecutive days resulted in contra trade violation attracting a penalty of Rs. 2 lacs.
Global view on contra-trade in derivatives
Section 16(b) of the Securities and Exchange Commission Act, 1934 of the USA, restricts contra trade in equity securities, for a beneficial owner holding more than 10% of any class of any equity security, director and officer, including a security-based swap agreement involving any such equity securities. Exemptions have been prescribed for derivative transactions in certain cases in CFR § 240.16b-3 of the General Rules and Regulations.
The General Rules and Regulations of the SEC provides detailed guidance on when a derivative trade qualifies as a short swing trade and vice versa. The same has been summarised here:
Transactions that qualify as “purchase” of underlying securities:
establishment/ increase of a call equivalent position
liquidation/ decrease of a put equivalent position
Transactions that qualify as “sale” of underlying securities:
establishment/ increase of a put equivalent position
liquidation/ decrease of a call equivalent position
Transactions that are exempt from short swing restrictions:
increase/ decrease pursuant to fixing of the exercise price of a right initially issued without a fixed price, where the date the price is fixed is not known in advance and is outside the control of the recipient
Closing as a result of exercise or conversion of the option, that is,
Acquisition of underlying securities at a fixed exercise price due to the exercise or conversion of a call equivalent position
Except in case of out-of-the money option, warrant or right
Disposition of underlying securities at a fixed exercise price due to the exercise of a put equivalent position.
Where the person trading is not a major beneficial holder, and thus, an insider, at the time of both the transactions which are being termed as contra trade [Section 16-b of SEC Act].
Other exemptions apply w.r.t. transactions with the issuer, subject to certain conditions and transactions pursuant to tax conditioned plans [CFR § 240.16b-6]
Article 164 of the Financial Instruments and Exchange Act, 1948 of Japan also restricts reverse trades in specified securities, by major shareholders and officers etc, who may have obtained secret information in the course of their duty or by virtue of their position. Specified securities, for the purpose of the said provision, include Derivatives [Article 163 r/w Article 2(xix)].
Judicial precedents on contra trade transactions
In Allaire Corporation v. Ahmet H. Okumus, the Circuit Court held that when the option is written by the insider, he has no control over whether the options buyer will exercise the option or square it off. Thus, trade carried out pursuant to selling an option shall not be considered a transaction for the purpose of determining whether a set of transactions is a contra trade or not. The facts of the case involved writing another option within six months of expiry of the first option remaining un-exercised. Note that the expiration of the first set of options does not constitute a purchase matchable to the later sale of a different set of call options.
However, as clarified in Roth v. The Goldman Sachs Group, Inc., et al., No. 12-2509 (2d Cir. 2014), when matched against its own writing, the expiration of an option within six months is a “purchase transaction” for the purpose of section 16-b.
The danger of misuse of non-public information exists at the time the option is written, and the expiration of that option is the moment of profit. Matching writings with expirations of different options does not clearly advance the purposes of the statute. Options written at different times are less likely to give rise to speculative abuse, and matching the expiration of an option only to its own writing recognizes the more evident danger.
In Chechele v. Sperling,the Circuit Court held that where pursuant to the settlement of the futures contract, the pledge on shares is revoked, the revocation is not considered to be a ‘purchase’ transaction to be combined with the open market sale of such shares to identify these trades as contra trades.
The exercise of a traditional derivative security is a “non-event” for section 16(b) purposes.
In the case of Macauley Whiting v. Dow Chemical Company, the Court held that where the insider has exercised an option to purchase shares and his spouse has sold shares within a period of 6 months, these transactions shall be considered to be short swing trades (contra trades).
In the context of § 16(a), the Commission has evolved a dual test of an insider’s beneficial ownership of his or her spouse’s shares. Such beneficial ownership may derive from the insider’s “power to revest” in himself title to those shares.[6] Or it may result from his enjoyment of ‘benefits substantially equivalent to those of ownership.’
In the case of Kern County Land Co. v. Occidental Petr. Corp., a person fails in his attempt of a takeover due to a defensive merger carried out by the target company. During the period when the merger was being finalised, the acquirer entered into an option agreement with the transferee company. The option agreement stipulated that if and when the merger succeeds, the transferee company would buy the shares held by the acquirer pursuant to the takeover attempt. The US Supreme Court held that such a set of trades would not result in contra trade because the actions of the acquirer were involuntary.
The option was grounded on the mutual advantages to respondent as a minority stockholder that wanted to terminate an investment it had not chosen to make and Tenneco, whose management did not want a potentially troublesome minority stockholder; and the option was not a source of potential speculative abuse, since respondent had no inside information about Tenneco or its new stock.
Concluding Remarks
In practice, several large listed companies continue to prohibit trading in derivatives by the Designated Persons and their immediate relatives through their Code of Conduct. The regulations do not enforce such blanket prohibition, although no trading can be done that falls foul of other requirements of the Regulations – viz., trading while in possession of UPSI, contra trades, trading during closure of trading window, trading without pre-clearance etc.
Having said that, derivatives, by nature, are short term trades based on the expectations of the movement in price of the securities in a certain direction within a short period of time. Therefore, in case of trades by DPs, the chance of such trades being motivated by an information asymmetry is comparatively higher, thereby potentially resulting in an insider trading allegation on such DP.
[1] Annexure VII of ICSI Guidance Note on Prevention of Insider Trading states “The designated persons and their immediate relatives shall not take any positions in derivative transactions in the Securities of the company at any time.” However, the source of such stipulation is not clear, as currently there is no corresponding provision in PIT Regulations.
Since the introduction of High Value Debt Listed Entities (HVDLEs) as a category of debt-listed entities placed on a similar pedestal to equity-listed entities in terms of corporate governance norms, the regime has undergone several rounds of extensions and regulatory changes. After several extensions towards a mandatory applicability of corporate governance norms, a new Chapter V-A was introduced in LODR, vide amendments notified on 27th March 2025 (see a presentation here), amending, amongst others, the thresholds towards classification of an entity as HVDLE (increased from Rs. 500 crores to Rs. 1000 crores). The new chapter, however, was not updated for the changes brought for equity-listed entities vide the LODR 3rd Amendment Regulations, 2024 and required some refinement, particularly, in respect of provisions pertaining to related party transactions (see an article – Misplaced exemptions in the RPT framework for HVDLEs and the representation made to SEBI).
In order to address the gaps as well as providing some relaxations to HVDLEs, SEBI released a Consultation Paper on 27th October, 2025 (CP) primarily proposed an increase in the threshold for identification as HVDLEs and alignment of provisions of Chapter V-A with the corresponding provisions in Chapter IV subsequent to LODR 3rd Amendment Regs, 2024 facilitating ease of doing business, including measures related to RPTs. The proposals were approved by SEBI in its Board Meeting held on 17th December, 2025.
SEBI vide Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2026 (‘LODR Amendment 2026’), has notified the following amendments effective from January 22, 2026.
Threshold for identification of HVDLEs
Increased from extant Rs. 1000 crores to Rs. 5000 crores . Further, the sunset clause of 3 years as per Reg 15 (1AA) & Reg. 62C(2) will not be applicable to entities that cease to be HVDLE due to revised thresholds.
Based on the data of pure debt listed entities as on June 30, 2025, revision in threshold will reduce the number of HVDLE entities from 137 to 48 entities (apprx. 64% entities)
VKCO Comments: The increase in the threshold was necessitated on account of the huge compliance burden placed on HVDLEs coupled with the fact that such threshold is disproportionately low for NBFCs engaged in substantial fundraising through debt issuances. Further, the proviso to Reg. 15 (1AA) & Reg. 62C (2) expressly clarifies the position for entities ceasing to be an HVDLE as on January 22, 2026 with the revised threshold coming into effect, that it need not continue to comply with the CG requirements for a period of 3 years. Earlier there had been instances of entities that ceased to be HVDLEs due to outstanding value of listed debt securities as on March 31, 2025 receiving notices from SEs for non-compliance with CG norms despite such entities ceasing to meet the revised threshold.
Alignment of corporate governance norms for HVDLEs with that for equity-listed entities
Board composition, committees, filing of vacancy of director/ KMPs etc.
Insertion of proviso to clarify that prior approval of shareholders is required for directorship as NED beyond the age of 75 years at the time of appointment or re-appointment or any time prior to the NED attaining the age of 75 years to ensure alignment with similar amendment made for equity listed entities [Reg 62D(2)/ Reg 17(1A)]
Time taken to receive approval of regulatory, government or statutory authorities, if applicable, to be excluded from the 3 months’ timeline for shareholders’ approval for appointment of a person on the Board [Reg 62D(3)/ Reg 17(1C)]
Exemption from obtaining shareholders’ approval for nominee directors of financial sector regulators or those appointed by Court or Tribunal, since such nomination is for the purpose of oversight and upholding public interest, and by SEBI registered Debenture Trustee registered under a subscription agreement for debentures issued by HVDLEs [Reg 62D(3)/ Reg 17(1C)]
Any vacancy in the office of a director of an HVDLE resulting in non-compliance with the composition requirement for board committees i.e., AC, NRC, SRC and RMC to be filled within 3 months [Proviso to Reg 62D(5)/ Reg 17(1E)]
Any vacancy in the office of a director of an HVDLE on account of completion of tenure resulting in non-compliance with the composition requirement for board committees i.e.. AC, NRC, SRC and RMC to be filled by the date such office is vacated [Second proviso to Reg 62D(5)/ Reg 17(1E)]
Additional timeline of 3 months for filling vacancy in the office of KMP in case of entities having resolution plan approved, subject to having at least 1 full-time KMP [Reg 62P (3)/ Reg 26A (3)]
Secretarial Audit
Alignment of the provisions of Secretarial Audit and Secretarial Compliance Report with Reg 24A as applicable to equity listed entities, to strengthen the secretarial audit and to prevent conflict of interests, which mandates the following: [Reg 62M(1)/ Reg 24A]
An individual may be appointed for a term of 5 years and a firm may be appointed for a maximum of 2 terms of 5 years each subject to approval of shareholders in the annual general meeting. Thereafter a cooling-off period of 5 years will be applicable;
Requirements relating to eligibility (being a Peer Reviewed Company Secretary) and disqualifications, removal of secretarial auditors prescribed.
The Secretarial Compliance Report also to be submitted by a Peer Reviewed Company Secretary or Secretarial Auditor fulfilling the eligibility requirements indicated in Reg. 24A.
VKCO Comments: Further disqualifications for Secretarial Auditor and list of services that cannot be rendered by the Secretarial Audit was prescribed vide Annexure 2 and Annexure 3 of SEBI Circular dated December 31, 2024 and further clarified vide SEBI FAQs on Listing Regulations (FAQ no. 5) and list of services provided by ICSI.
The amendments made in Reg 24A in December, 2024 were required to be ensured by the equity listed companies with effect from April 1, 2025 for appointment, re-appointment or continuation of the Secretarial Auditor of the listed entity. Therefore, it was amply clear that the applicability is prospective and to be ensured while appointing Secretarial Auditor for FY 2025-26 onwards. Reg. 24A (IC) clarifies that any association of the individual or the firm as the Secretarial Auditor of the listed entity before March 31, 2025 is not required to be considered for the purpose of calculating the tenure.
Pursuant to LODR Amendment 2026, Reg. 62M (1) cross refers to the requirements under Reg 24A which in turn mandates compliance with effect from April 1, 2025. However, it may not be practically feasible for HVDLEs to ensure compliance towards the end of the financial year and a transition time may be required by such HVDLEs. In our view, the requirements should be applicable for Secretarial Auditor appointments with effect from April 1, 2026 which will be required to be done with shareholders’ approval at the AGM 2026 and not impact the existing tenure/ appointments already done by HVDLE.
Related Party Transactions
Alignment of RPT related provisions with Reg 23, instead of reproducing each of the amendments made in Reg 23 effective from December 13, 2024 and November 19, 2025 [Reg 62K (1)]
Turnover scale based materiality thresholds for RPTs and other amendments applicable to equity-listed entities are now applicable to HVDLEs (see an article on the approved amendments here)
NOC of debenture-holders through DT to be obtained in the manner prescribed by SEBI [Reg 62K (5)] (see our FAQs here)
Aligning the exemptions from RPT approval and clarification on ‘listed’ holding company, with amendments made in Reg. 23 (5) [Reg 62K (7)]
VKCO Comments: Pursuant to the above amendments, HVDLEs will be able to avail the benefits of recent amendments made in Reg 23 as detailed below:
Remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management, except who is part of promoter or promoter group, shall not require audit committee approval or disclosure if it is not material.
Independent directors of the audit committee, can provide post-facto ratification to RPTs within 3 months from the date of the transaction or in the immediate next meeting of the audit committee, whichever is earlier, subject to certain conditions like transaction value does not exceed rupees one crore, is not material etc. The failure to seek ratification of the audit committee can render the transaction voidable at the option of the audit committee and if the transaction is with a related party to any director, or is authorised by any other director, the director(s) concerned shall indemnify the listed entity against any loss incurred by it. Audit committee can grant omnibus approval for RPTs to be entered by its subsidiary in addition to listed entity subject to the certain conditions.
Exemption for RPTs in the nature of payment of statutory dues, statutory fees or statutory charges entered into between an entity on one hand and the Central Government or any State Government or any combination thereof on the other hand or transactions entered into between a public sector company on one hand and the Central Government or any State Government or any combination thereof on the other hand.
Scale based threshold for determining material RPTs ranging from minimum of 10% of annual consolidated turnover to Rs. 5000 crore based on the consolidated turnover of the HVDLE.
Prior approval of the audit committee of the listed entity required for a subsidiary’s RPTs above Rs. 1 crore if it exceeds the lower of 10% of the annual standalone turnover of the subsidiary (or 10% of paid-up share capital and securities premium, if no audited financials of at least one year) or the listed entity’s material RPT threshold under Regulation 23(1) of LODR.
Omnibus shareholder approvals for RPTs granted at an AGM shall be valid up to the next AGM held within the timelines prescribed under Section 96 of the Companies Act, 2013 (currently maximum 15 months), while such approvals obtained in general meetings (other than AGMs) shall be valid for a maximum of one year
The most critical point that remains pending to be addressed is the nature of disclosures to be made before the audit committee and shareholders while approving RPTs – as to whether the existing disclosure requirements as per Chapter VIII of SEBI Master Circular dated July 11, 2025 will apply or the threshold based disclosure requirement as applicable to equity listed companies i.e. disclosure as per Annexure 13A of SEBI Circular dated October 13, 2025 for RPTs not exceeding 1% of annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity or ₹10 Crore, whichever is lower, and disclosure as per ISN on Minimum information to be provided to the Audit Committee and Shareholders for approval of Related Party Transactions for RPTs exceeding the aforesaid limit. Considering that HVDLEs will be proceeding with obtaining omnibus approval for RPTs proposed to be undertaken during FY 2025-26, in the absence of any clarification or amendment in the Master Circular, the HVDLEs will continue to follow the existing disclosure requirements.
Other amendments
Recommendations of board to be included along with the rationale in the explanatory statement to shareholders’ notice [Reg 62D(17)/ Reg 17(11)]
Exemption from shareholders’ approval requirements for sale, disposal or lease of assets between two WoS of the HVDLE [Reg 62L (6)/ Reg 24(6)]
Minor terminology changes from year to financial year, income to turnover etc.
Disclosure requirement of material RPTs in quarterly corporate governance report omitted. Format and timeline of period CG compliance report to be prescribed by SEBI [Reg 62Q(2)/ Reg 27(2)]
VKCO Comments: For equity-listed entities, reporting on compliance with corporate governance norms are a part of Integrated Filing – Governance, required to be filed within 30 days from end of each quarter. The move to provide flexibility to SEBI in prescribing timelines for corporate governance filings may be in order to extend the applicability of Integrated Filing requirements to HVDLEs as well.
Conclusion
While the present amendment strictens the compliance requirement for the HVDLEs with outstanding listed debt securities of Rs. 5000 crore or more, it also provides the ease of compliance as provided for certain matters to equity listed companies. The actionable for HVDLEs will be mainly amending the RPT policy to align with the amended requirements, evaluate the eligibility of the existing secretarial auditor in the light of amended requirements. The entities that cease to be HVDLEs can evaluate the need to retain the committees and policies, in the light of applicable laws.
ROCs uncovering SBOs through publicly available information
– Pammy Jaiswal and Darshan Rao | corplaw@vinodkothari.com
Introduction
The framework for SBO identification can be traced back to the recommendations of the Financial Action Task Force (FATF), a global watchdog for combating money laundering and terrorist financing. Section 90 of the Companies Act, 2013 (‘Act’) read with its Rules translates the recommendations into provisions for enforcing the concept, with two broad manners of identification methods. The first being the objective test where the shareholding is picked up through the layers to see the type of entity and the extent of holding to identify the SBO for the reporting entity. The second is the subjective test where the aspects of control and significant influence are evaluated from all possible corners to reach the SBO. It is generally seen that the objective test is the most common way for SBO identification, however, in most of the cases where the regulator has made the identification, it has held the hands of subjectivity. As a follow-up to the LinkedIn case[1], we have discussed a few other rulings where the RoC has taken diverse ways under the subjectivity armour to reach out to the SBOs. The article also explains the principles of law that emerge from every case law, giving a broader angle to the readers on the ever evolving corporate governance norms in the context of SBO identification.
Some of the aspects via which SBOs have been identified in the rulings discussed in this article are as follows:
Control over the Board of the listed overseas parent
CEO in relation to and not only of the Pooled Investment Vehicle
Financial dependence and control established via usage of common domain name
Erstwhile promoters obligation to disclose where the new promoters are exempt for the then time period
We have discussed these in detail in the following paragraphs to inform the way RoCs went on a spree to unearthen the SBOs taking shields of the language of the existing legal provisions around SBO identification.
Subjectivity facets for SBO identification
As discussed above, the two broad subjective tests for SBO identification are right to exercise or the actual exercising of significant influence or control over the reporting entity. It is imperative note the relevance of stating both the situations as a potential to become SBO for the reporting, being:
Right to exercise significant influence or control [note here that actual exercise is not a prerequisite]; or
Actual exercising of significant influence or control.
Further, it is pertinent to note that ‘control’ has been defined under Section 2(27) of the Act to “include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.
Again, the term ‘significant influence’ has been defined under Rule 2(1)(i) of the SBO Rulesas the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.
In the following parts of the article, we will be able to know, the manner in which these aspects have been investigated to reach out for the SBOs.
A. Examining cross holdings, chairmanship and other publicly available data[2]
The Indian reporting entity was a WoS of an overseas listed entity which was a large conglomerate and hence there were several cross holdings in the entities in the top level. There was no declaration of SBO in the given case on account of the argument given that the holding entity is a listed company and hence, there is no individual holding control or significant influence over the said parent. Enquiry was made about the details of the promoters, directors, KMP and shareholders of certain promoter entities as well as chairperson of board meetings and UBO for the reporting company.
Further, upon investigation into the public records of the holding entity, it was found that one particular individual from the promoter category along with his family holds approx 21.46% in the ultimate parent entity and that his son significant stake in two other promoter group entities which in turn holds in the ultimate parent entity of the reporting company.
RoC concluded that the son along with his family members, directly and indirectly exercises significant influence in the ultimate parent. Further, the same person also holds the position of a chairperson in the said entity when the said company already has a full-fledged chairperson already indicating a situation of proxy control through legally remote mechanism. Accordingly, he should have been declared as SBO for the reporting company in India. The snapshot of holding is given below:
B. Individual manager/ CEO related to Pooled Investment Vehicle and not necessarily of the Investment Vehicle[3]
In cases where the SBO is identified via the members holding the reporting company and the ultimate shareholder as such is a pooled investment vehicle, in that case even if there is no individual as a general partner or the investment manager or the CEO of such vehicle, then any individual in relation to the pooled investment vehicle and not necessarily of such a vehicle can be regarded as an SBO. In this case the CEO of the investment manager was considered as an SBO since he was the one responsible for the decision making of such investment manager and hence, relevant for investment decisions of the vehicle.
While arriving at the conclusion of this ruling, RoC clearly indicated that the legislative scheme of Section 90 ensures that at the end of every ownership chain, a natural person(s) must be identifiable as the SBO. Companies cannot rely on the complexity of foreign fund structures or the absence of direct nominees to evade compliance; the obligation to investigate and file BEN forms lies squarely on the Indian company. The ROC implicitly aligned Indian law with FATF Recommendations 24 and 25[4], emphasizing that beneficial-ownership disclosure extends through investment vehicles, LLPs, and trusts
C. Financial / Business Dependency, Usage of common domain name, KMPs of foreign parent employed in Indian reporting company[5]
In a very interesting case where 100% of the shares were only held by a few individuals, RoC concluded that even in such entities identification of SBO is still possible on account of assessment of several factors. These include the reporting test as well as financial control test. In such cases, one may consider evaluating the business dependency in terms of supply to or from the reporting entity, other clues like entities with a common domain name, similarity in trademark, procurement policies.
In this case it was investigated and consequently observed that the shareholder of the reporting company held a controlling stake in the overseas supplier entities on which the reporting company had the highest dependency. Further, the RoC also found out that both the reporting company and these supplier entities had applied for a similar trademark. Further, these entities were reported to be under the common control of an individual who happens to be the director as well the majority shareholder of the reporting company. It is also imperative to note that one of the director-cum senior employees and another senior employee are the ones who have been shown as the supervisor and UBO for the overseas supplier entities.
In this ruling, RoC also referred to the FATF Guidance[6] on control in cases with no shareholding. It includes the following means:
Control through positions held within a legal person: Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances. Depending on the legal person and the country’s laws, directors may or may not take an active role in exercising control over the affairs of the entity.
Control through informal means: Furthermore, control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. Further, when an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.
D. Current exemption gets overruled by past obligation to declare[7]
ROC held clearly in this case that the current holding structure even though exempt from the disclosure requirements pursuant to Rule 8 of the SBO Rules, the same will still be subject to penal actions where the declaration was not made as and when applicable in the period prior to qualifying for such exemption.
Concluding Remarks
On perusal of each of these rulings, it becomes clear that no matter how complicated or how simple the corporate structure is, the regulators will leave no stone unturned while carrying on their investigation for finding the real SBOs. Regulators have the determination to uncover SBOs who exercise control behind every legal entity.
A few measures that can be adopted include establishing robust frameworks to continuously track changes in shareholding and control arrangements, maintaining detailed documentation of every ownership and control analysis conducted and filing all SBO disclosures promptly with the Registrar of Companies (RoC). It is also imperative that suitable amendments are made to define the ‘ultimate beneficial owner’ (UBO) rather than the ‘significant beneficial owner’. To some extent, this can be helpful to those corporations with several layers of entities to identify the UBO, although the process would lose its viability considering the scale and extent of tracing.
However, the concern that remains is that the exercise to trace the origins of relationship may prove to be an onus on entities apart from the penal consequences it carries in case of non-compliance.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-27 18:16:132025-10-28 12:54:23Piercing through subjectivity to reach out for SBOs
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This present write-up attempts to underscore the importance of platform-neutrality in multi-lending platforms (i.e., digital platforms where a borrower is able to choose from the loan offers made by multiple lenders against a requested product). It assumes relevance because the sincere borrower places their faith in these platforms, and hence should receive truthful and unbiased information necessary to enable informed decision-making. The article assumes contemporary significance in view of November 1, 2025, applicability of Para 6 of the Digital Lending Directions, 2025.
In the case of a lending application that is not multi-lender, the question of the borrower’s decision-making being impaired is not as pertinent since they do not have much of a choice regarding various loan products or lenders.
We have previously discussed the same from the standpoint of regulatory compliances to be ensured by the lenders and their LSPs under Digital Lending Directions, here. Hence, the instant write-up focuses on fundamental considerations from a principles standpoint, that one must not lose sight of while operating such Multi-lender platforms.
I. A First-Principles Background
Why do we visit a marketplace, rather than shop from a particular retailer? One’s Diwali shopping, for instance, could be done solely on one particular brand’s website. Why bother visiting the mall or browsing through different labels on Amazon? There may be several reasons, but they all largely centre on the consumer’s desire to make an informed decision after comparing the available options and getting the best bargain. Such forums also promote competition amongst the different sellers and fuel the engine of innovation.
A similar desire naturally propels the customer who goes onto a lending marketplace to compare the offerings of various lenders and avail the desired credit facility. At this point, what is spoken of specifically is the “multi-lending marketplace”, i.e, a forum where a borrower has multiple contending lenders against a given loan request. And here, unlike some festive garments, the consumer’s personal finances, aspirations, and future creditworthiness are at stake.
The role of the marketplace in such cases would be intermediation and facilitation of the financial services. In case, however, it ends up using its forum to favour and promote certain lenders unequally, or alter the prices of the products (sold by merchants) in a manner commercially favourable to itself, while still representing itself to be a neutral forum, it would subvert the principles of fair competition.
It would also be deceitful to the customer, who is under the impression that they are receiving a fair and accurate representation in terms of prices and quality.
Thus, it is clear that the platform has a duty of transparency and fairness towards the borrowers and the lenders who are onboarded. This is the spirit that abides as the undercurrent of platform regulation in digital lending; the rest is commentary.
It must also be noted that offers made on loan platforms are final, such that it is the borrower who makes the choice, and not the lender. The lender has presumably already made the choice of offering the loan to the borrower; otherwise, there was no question of displaying the loan offered by the particular lender. Therefore, once the platform displays the names of various lenders offering the loan, the platform is making loan offers on behalf of different lenders. The platform is admittedly an agent of the multiple lenders, and has been empowered by the respective lenders to make loan offers. Therefore, once the platform displays multiple loan offers, the platform is acting in the capacity of an agent and is displaying the loan offers from each of these lenders. It is not proper to take a position that these offers are merely indicative, and the lenders have the option of rejecting the borrower after their loan offers are displayed and selected. This position emerges from a reading of Para 6(i) and (iii) of the Digital Lending Directions, 2025.
A multi-lender platform approaches the borrower with the premise that there are several lenders whose offerings for a potential loan are available, such that the borrower can get the best deal, which he then selects. This is different from a single lender app, where the borrower is fully aware that he is approaching a single lender. In order for a platform to answer the basic attributes of a platform, the platform must adhere to some of the essential principles:
neutrality
comparability
no leveraging of borrower information to gain unfair advantage, etc.
“Neutrality” here simply means that the platform remains unbiased and neutral to the interests of the parties, without using its position to promote/advantage any party (including itself) to the exclusion/disadvantage of the other, while it is still representing itself to be a neutral platform. Neutrality is one of the essential tenets of claiming to be a platform, and not being neutral will be a contradiction in terms.
III. Common scenarios where a lending platform’s neutrality may be vitiated
Some scenarios where a lending platform’s neutrality may be vitiated are as follows:
In case the products of certain lenders are being promoted to the exclusion of other lenders, potentially owing to the commission or fees received from such lenders.
Where the platform has a parent or subsidiary that is a lender, favouring such lender’s products by the platform (whether explicitly or tacitly).
Where the platform alters the competitive conditions amongst the various lenders, and attempts to neutralise the competitive aspects of their offerings by showcasing the loan products of different lenders at the same terms (say, for instance, by adjusting the commission payable by the lender to the platform with the rates of interest, such that the same ROI and other terms are offered by all lenders).
Where, through the use of dark patterns or deceptive design practices, the decision-making of the consumer is subverted.
Where crucial information pertaining to the loan product (such as tenure, APR, any hypothecation of goods, etc) are deliberately masked, concealed, or distorted by the platform.
IV. Principles of neutrality for lending platforms
Drawing from global norms (pertaining to platform regulation), RBI regulations, consumer protection law, and antitrust law, one may synthesize the following principles of neutrality for lending platforms:
1. Objectivity: The content displayed by the platform “shall be unbiased, objective and shall not directly/ indirectly promote or push a product of a particular RE, including the use of dark patterns/deceptive patterns designed to mislead borrowers into choosing a particular loan offer” (see Para 6 of the Digital Lending Directions, and Para 7 of the Draft NBFC-Credit Facilities Directions, 2025)
2. Competitive conditions & fairness: Platforms should not enter into arrangements with lenders which would have the effect of distorting competitive conditions, and creating an “appreciable adverse effect on competition”. For instance, if the lenders are charging different rates, the platform adds its own differential fees (may be in one or more forms – platform fees, servicing fees, etc) to equate the rate that is finally offered to the borrower. For example, three lenders, L, M, and N, are on the platform, respectively expecting 13%, 14% and 15% return on specific qualifying loans, the platform adds a 4%, 3% and 2% fee, respectively, such that the APR offered to the borrowers is exactly 17%. Here, all lenders offering the same terms of loan to the borrower would not just kill the competition but also leave the borrower with no possible choice or selection as such. These may be perceived as a vertical restraint, and in cases of large platforms, as an abuse of dominant position [Section 3(4) and Section 4 of the Competition Act, 2002].
Additionally, neutrality also predicates that there is no preferential positioning so as to enable fair and free choice of the consumer affected. Preferential listing of products in particular may give rise to an investigation and penalty under the Competition Act (seehere). It is not necessary that such agreements be written and formalised; indeed, as observed by the Competition Commission of India:
“The definition of ‘Agreement’ under the Act is an encompassing/inclusive one. It includes any arrangement, understanding, or action in concert, neither necessarily in writing nor intended to be enforceable by legal proceedings”.[1]
3. Comparability & transparency: Borrower should be provided with all the information required to enable informed decision making. Non-disclosure of the essential loan terms being offered by the lenders shall impact the right to choose of the borrower. The essential terms include details of the sellers, and salient details of the loan product by way of KFS (such as APR, ROI, penal charges, etc) (see Para 6 of the Digital Lending DirectionsDraft and Para 7 of the Draft NBFC-Credit Facilities Directions, 2025)
4. Competitive prices and terms of the loan: Platforms need to ensure that the borrower’s right to be assured of access to services at competitive prices [see Section 2(9) of the Consumer Protection Act, 2019] is not vitiated by the platform. Further, platforms should not “manipulate the price of the goods or services offered on its platform in such a manner as to gain unreasonable profit by imposing on consumers any unjustified price having regard to the prevailing market conditions, the essential nature of the good or service” [from the rules applicable to E-Commerce platforms, see Rule 4(11) The Consumer Protection E-Commerce Rules, 2019].The whole purpose of the platform was to offer competing loans to the borrower, however, the act of equating the rates by the platform is against competition principles. In such a case the rate is, in true sense, being decided by the platform and not the lenders, which would be breaching the principle of neutrality. At the same time, with the same borrower, the fee being charged by the platform should not be different across lenders. If the platform is absorbing credit risk to the extent of first loss, the cost of that risk cannot be different for different lenders, with the same borrower. Neither is the cost of sourcing or servicing different. For the lenders, it is essential that the pricing of the loan has to reflect the cost of capital, risk premium, etc. The lenders will find it difficult to justify the cost charged to the borrower, as the differential fee is serving to equate the loan offers.
5. Non-discrimination amongst the borrowers: Borrowers belonging to the same class should not be discriminated against. For instance, where the borrowers belong to the same rank in terms of creditworthiness, other data (such as their spending history, websites accessed, etc) should not result in them receiving higher rates of interest, or additional charges for the facility (merely because it is indicative of a greater spending power). [see Rule 4(11) The Consumer Protection E-Commerce Rules, 2019].
On the question whether E-Commerce Rules are applicable to multi-lender platforms, even if there is some opacity currently, at least the basic principles applicable to such platforms should apply to every platform – be it a loan platform, bond investment platform, platform for travel tickets, insurance policies, or likewise.
V. Comparative responsibilities at a glance
For the reader’s ease of reference, a comparative table of different lending platforms is given below:
Single Lender DLA
Non MLL Marketplace
Multi-Lender Lending (MLL) Marketplace
Meaning
A single lender operates a Digital Lending App to source and service customers. This is not a lending marketplace as such.
Although various lenders may be onboarded onto such a platform, against a requested facility, there would not be multiple lenders. For e.g., Lender A offers gold loans, Lender B offers vehicle loans, etc. Hence, in such cases, the consumer would not have to choose between the offerings of multiple lenders.
A multi-lender marketplace would intend to offer multiple loan options from different lenders For instance, when a consumer requests a gold-loan facility, they may have offers from Lender A, B, and C.
Duties of the lender and platform
Lenders would need to ensure that the compliance obligations relating to the use of DLAs are discharged.
There would be obligations upon both the lender and the platform. The lender would need to ensure obligations emanating from RBI regulations and consumer protection law are discharged. However, given that the platform is operating a forum facilitating trade in lending services, in our view, it should ensure adherence to the principles and rules under the E-Commerce Rules, 2020. Note: In our view, the compliances under Para 6 of the DL Directions would not be attracted in this case, as it is not a multi-lender LSP. For more on this, see our explainer here.
Here, in addition to the regular compliances applicable to digital lenders, the following would apply: On lenders: Lenders would need to ensure compliance under Para 6 of the Digital Lending Directions, 2025. On the platform itself: In addition to the aforementioned consideration from E-Commerce Rules, the following principles should be ensured: ObjectivityPromote competitive conditions and fairness Comparability and transparency Access to competitive pricesNon-discrimination amongst the borrowers
Position of the platform owner as an LSP
No, if the DLA is that of the lender; yes, if the DLA is that of a different entity
Yes
Yes
[1] Delhi Vyapar Mahasangh and Flipkart Internet Private Limited and ors.
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As a part of the RBI’s recent consolidation exercise, RBI has released Draft Reserve Bank of India (Commercial Banks – Governance) Directions, 2025. This exercise integrates decades of existing circulars into a streamlined framework, enhancing clarity and ease of governance. While primarily a consolidation, the RBI has undertaken extensive clause shifting, reorganisation, and pruning of redundancies to improve accessibility. Further, new provisions have been introduced for Private Sector Banks (PVBs) in line with the Discussion paper on Governance in Commercial Banks in India dated 11th June, 2020 or in alignment with the provisions applicable to Public Sector Banks (PSBs). Below are some of the key highlights from this consolidated framework for PVBs:
1. Additional disqualifications for Fit and Proper Criteria
The Draft Directions specify additional disqualification conditions for a person proposed to be appointed as a director in a PVB. These include:
Common directorship with a Non-Banking Financial Institution (NBFI) or
Association of the proposed candidate with such institutions in any other capacity.
The institutions engaged in the following activities are covered by the said restriction:
finance,
investment,
money lending,
hire purchase,
leasing,
chit / kuri business,
Mutual funds,
Asset Management Companies and
other para-banking companies.
The term “NBFI” has not been used in the Draft Directions, however, taken from the 2020 Discussion Paper. The 2020 Discussion Paper permitted common directorship with NBFIs subject to certain conditions, and defined NBFI as:
Non-banking financial institutions (NBFI) are entities engaged in hire purchase, financing, investment, leasing, money lending, chit/kuri business and other para banking activities such as factoring, primary dealership, underwriting, mutual fund, insurance, pension fund management, investment advisory, portfolio management services, agency business etc.)
The scope of restriction under point (b) is wider, and covers association “in any other capacity”. However, directorship is permitted in such cases, subject to compliance with certain conditions, viz.,
The institution does not enjoy any financial accommodations from the concerned PVB;
Person does not hold whole time appointment in the institution; and
The person does not have substantial interest’ in the institution as defined in Section 5(ne) of the Banking Regulation Act, 1949.
Note that the meaning of “institution” itself is vast, and covers, incorporated and unincorporated entities including individuals.
The proposed inclusion is also in partial alignment with the condition specified in fit and proper criteria for PSBs that states:
A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities shall not be considered for appointment as elected director.
2. Clarity w.r.t. the role of Board, EDs and NEDs
The 2020 Discussion Paper had elaborate discussion on the role of the board of the banks, primarily drawing reference from the Basel Committee on Banking Supervision Guidelines of 2015, in addition to the existing requirements specified through various circulars.
The Draft Directions further sets out the expectations from the MD/ CEO/ WTDs vis-a-vis NEDs, alongside the role of board.
Para 51 and 52 of the Draft Directions specifies role of the board, which includes:
Conduct affairs in a solvent, adequately liquid and reasonably profitable manner
Ensure that the Memorandum and the Articles of Association spell out the duties, functions and obligations of the directors towards the PVB
Institutionalise discussions between its management and the Board on quality of internal control systems
Set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization.
For NEDs, Para 52 & 53 of the Draft Directions sets out the expectations from the NEDs, including areas that NEDs should pay particular attention to. Para 54 further provides various positive and negative stipulations, some of which are stated below:
Negative stipulations
Positive stipulations
not be an employee of the PVB.
have no power to act on behalf of the PVB
nor can they give any direction to the employees of the PVB on behalf of the management.
desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO / CEO of the PVB.
exercise power only as a member of a collective body, unless specifically authorised by a Board resolution,
not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent.
not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters.
act with ordinary person’s care and prudence
disclose the nature of interest to Board wherever directly or indirectly interested or concerned in any contract, loan, arrangement or proposal entered/ proposed to be entered and not to vote on any such proposal [similar to sec. 184 of CA]
As regards CEO & MD/ CEO/ WTDs, Para 56 of the Draft Directions state that they should act as a bridge between the board and management. They are charged with the responsibility of efficient management of the bank on behalf of the Board. It is through them that the programmes, policies and decisions approved by the Board are made effective and again it is through them that the Board gets the responses and reactions of those at various levels of the organisations to its deliberations.
A mapping of the various provisions of the Draft Directions as applicable to PVBs vis-a-vis the existing applicable circular setting out such requirements can be accessed here.
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