From Bye Backs to Buy Backs: how new taxation rules impact equity extraction

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– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com

Finance Bill, 2026 brings tax relief to investors for share buybacks, by partially restoring the position that existed before the Finance Bill 2024 amendment. The 2024 Finance Bill changed the taxability of buybacks to impose tax on buyback consideration, taxing the entire “receipt” as “dividend”, implying tax at applicable regular tax rates rather than as capital gains.[See our article on the 2024 amendments here.] 

The 2026 Bill proposes omission of Section 2(40) (f), [dealing with deemed dividend] and amendments to Section 69,  [specifically dealing with tax on buybacks]. The net result of this:

  • Buyback consideration not to be treated as deemed dividend; 
  • Shareholder pays tax on the difference between buyback consideration received and cost of acquisition taxable as capital gains – depending on whether the gain in short term (20%) and long-term (12.5%)
  • In case of promoter shareholders, an additional tax, so as to bring the effective tax rate to 22% in case of corporate shareholders, and 30% in case of non corporate shareholders. No difference between short-term and long-term capital gains. 

Applicability of the amendments: The amended provisions apply for buybacks done on or after 1st April, 2026. The existing provisions were introduced effective 1st Oct., 2024 and therefore, they would have had a life of only 15 months.

Why buyback? 

Buyback is not merely a means of distribution of profits to the shareholders. There may be various reasons or motivations for which buyback may be done by a company, for example: 

  • Distribution or upstreaming of profits – Buyback is used as a means of distribution of accumulated profits (free reserves as well as securities premium) to the shareholders.
  • Scaling down of operations – It is a mode of scaling down the operations of the company, without going through the tedious process of capital reduction through NCLT. 
  • Selective exit to certain shareholders – Buyback may also be used as a means of providing selective exit to certain shareholders, based on pre-determined arrangements. This may include, for instance, exit to some strategic investor, or a particular promoter, or shareholders not willing to dematerialise their securities etc. 
  • Put options to strategic or private equity investors – In case of strategic/ private equity investors, the shareholder agreements may include clauses on exit through put options. One of the ways of giving exit to the shareholders exercising the put option may be through buyback of their shares. 
  • Encashment of stock options granted to employees – It is quite common primarily in case of start-ups, to go for buyback of ESOPs granted to employees, instead of issuing shares upon exercise of options. This helps in providing liquidity to the employees, while also avoiding dilution in the shareholding structure of the company. 

Concept of Buyback and Compliances Involved

  • Governed by section 68 of the Companies Act read with the rules made thereunder (also see figure 1)
  • Out of free reserves, securities premium or proceeds of issue of shares 
  • Only upto 25% of paid up share capital and free reserves, with shareholders’ special resolution
  • Maximum no. of equity shares cannot exceed 25% of total paid-up equity share capital for that financial year 

For detailed guidance on the procedure and compliances involved, refer to our FAQs on buyback here.

Figure 1: Buyback process and timelines under Companies Act

Reduction of share capital as an alternative to buyback 

For buyback of capital beyond the statutory limits, the provisions of capital reduction u/s 66 apply. With the buyback consideration being taxed as deemed dividends, capital reduction through NCLT route was also being seen as an alternate route for scaling down capital in a relatively tax-efficient manner. There are rulings favouring capital reduction as an alternative to buyback, for instance, the ruling of NCLAT in the matter of Brillio Technologies Pvt. Ltd v. ROC, subsequently also referred to by NCLT Mumbai in the matter of Reliance Retail Ltd. Some of these rulings even permitted selective reduction of capital.  See our article on reduction of capital here.

One of the primary deterrents in capital reduction u/s 66 of the Companies Act is the approval requirements – of the shareholders, creditors and even the NCLT. 

Buyback of shares vis-a-vis dividend on shares 

The scope of dividend distribution is quite narrower as compared to share buybacks. The primary difference between the two is in the source of payment. Dividend distribution can be made only out of surplus; where free reserves are proposed to be utilised for dividend payment, additional conditions are applicable. In no case, can such declaration be made out of securities premium, or proceeds of fresh issuance – which are permissible sources for buyback. Buyback, on the other hand, requires mere liquidity, availability of profits is not mandatory. Therefore, dividends are merely a way to upstream the earned profits; buyback can even be the way to scale down, for example, by releasing the share premium, or using one class of shares to buy back the other.

Once dividend is approved by shareholders with requisite majority, there is no provision for a shareholder to waive off his right to  the dividend [see our article on the same here], and unclaimed dividend, if any, are kept in a separate account to be transferred to IEPF. In case of buyback, while the same is also offered to all shareholders, the buyback consideration is paid only to such shareholders who tender their shares for buyback; the question of waiver of rights or unclaimed amounts does not arise.  

Buyback taxation: existing scenario vs new scenario

Particulars Finance Bill, 2024Finance Bill, 2026
Applicability for buybacks done w.e.f. 1st October, 2024w.e.f. 1st April, 2026  
Taxable as Deemed dividend. The holding cost of the bought back shares allowed as short term capital lossCapital gains 
Tax incidence on Recipient shareholderRecipient shareholder
Amount taxable Entire buyback consideration Gains on buyback, that is, Buyback consideration minus, cost of acquisition 
Rate of tax Applicable income tax slab rate LTCG – 12.5%, subject to exemption upto Rs. 1.25 lacs STCG: 20% In case of promoters: 22%/ 30% (depending on whether domestic company/ otherwise)
Differential treatment for promoter shareholders No Yes, additional tax rates apply 

Under the erstwhile regime, the entire buyback consideration was taxable as deemed dividend, with the cost of acquisition claimable as capital loss. In such a case, the higher the cost of acquisition on such shares, higher would have been disincentive in the form of taxing the cost component as dividends. The benefits of capital loss depend on the existence of capital gains, and hence, the effective tax rates on buyback could not be ascertained. 

In the amended tax regime, buyback consideration, minus, cost of acquisition, is taxed at flat rates of capital gains – 12.5%/ 20%, depending on whether the capital gains are long-term or short-term in nature. 

Disincentives under the extant regime and market reaction

The disincentives were two-fold: 

  1. Higher tax slabs: The treatment as “deemed dividend” resulted in higher tax rates for top bracket individuals, as compared to capital gains, chargeable @ 12.5%/ 20% – depending on long-term/ short-term capital gains. 
  2. Taxing entire consideration: The entire “receipt” was taxable, instead of the actual gains, that is, excess of the receipts over the cost of acquisition.
  3. Cost of acquisition as capital loss: The cost of acquisition was to be treated as short term capital loss. As a result, there is an advantage to those shareholders who have short-term capital gains to offset the short term capital loss created as a result of the buyback. Note that the deemed dividend, in case of corporate shareholders, may be claimed as a deduction u/s 80M.

Resultant market reaction: a sharp decrease in buyback offers during FY 24-25 as compared to previous financial years. As per the publicly available data in case of listed companies, the total buyback size for 2024-25 was ₹7,897 Crores when compared to 2023-24 with a buyback offer size of Rs. 49,836 crores, indicating a decrease of 84.2 per cent.

The number of buyback offers sharply declined, with only 17 instances of buyback offer by listed entities between 1st October 2024 till date (3rd February, 2026) as compared to about 36-40 instances in each of FY 22-23 and FY 23-24. 

How Finance Bill 2026 rationalises the tax treatment?

Pursuant to the Finance Bill, 2026, the buyback taxation appears to be rationalised in the following manner: 

  • Buyback consideration not to be treated as deemed dividend [omission of clause (f) to Sec 2(40)]
  • Difference between consideration received and cost of acquisition taxable as capital gains [S. 69(1)]
    • In the hands of the recipient shareholder
  • In case of promoter shareholders, tax payable at higher rates depending on whether promoter is a domestic company or not
    • Effective rate of 22% in case of domestic company and 30% in case of persons other than domestic company 

With this, while the tax incentive remains in the hands of the recipient shareholders, the tax treatment is rationalised in the form of value that is to be taxed and the manner in which tax is levied. However, the provision differentiates between a promoter and non-promoter shareholder. 

Meaning of promoter: moving beyond the statutory definition

In case of listed company

  • Refers to the definition of promoter under Reg 2(1)(k) of SEBI Buyback Regulations 
  • SEBI Buyback Regulations, in turn, refers to Reg 2(1)(s) of SAST Regulations
  • Under SAST Regulations, promoters include “promoter group” 
Promoter Promoter group
Person having control over the affairs of the company, or Named as promoter in annual return, prospectus etc. Includes immediate relatives of promoters Entities in which >20% is held by promoters Entities that hold >20% in promoters etc. Persons identified as such under “shareholding of the promoter group” in relevant exchange filings

The scope of “promoter group” thus, is much broader than “promoter”. 

In case of an unlisted company 

  • Refers to the definition of promoter under Sec 2(69) of the Companies Act 
  • Concept of promoter group is not there under Companies Act 
  • To broaden the scope, a person holding > 10% shares in the company, either directly or indirectly, has also been covered. 

Question may arise on what does “indirect” shareholding mean? Does it include shareholding through relatives, or through other entities as well?  The word “indirect” is not the same as “together with” or “persons acting in concert”. Indirect shareholding should usually mean shares held through controlled entities.

Why additional tax for promoters? 

The amendments bring higher tax rates for promoters, in view of the distinct position and influence of promoters in corporate decision-making including in relation to buyback transactions. Promoters may want to influence buyback decisions for various reasons, for example: 

  1. Providing exit to an existing promoter/ strategic shareholder in accordance with any existing arrangement 
  2. Creation of capital losses (assuming buyback consideration is lower than the cost of acquisition) thus setting off the capital gains earned from other sources
  3. Encashing securities premium or accumulated profits in the company etc. 

In view of the promoter’s ability to influence buyback decisions to meet own objectives, additional tax is levied on buyback consideration received by the promoters, thus addressing any tax-arbitrage that could have been created through buybacks.

See our Quick Bytes on Budget, 2026 at here

Our other resources on buyback at here

RBI Issues Draft Directions on Relief Measures in Areas Affected by Natural Calamities for Regulated Entities

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Simrat Singh | finserv@vinodkothari.com 

When nature unsettles the ordinary course of life, the regulatory hand should neither be withdrawn nor clenched; it should extend a humane touch, easing distress and guiding the return of order. In this spirit, the RBI has released draft directions on Relief Measures in Areas Affected by Natural Calamities, setting out a framework under which banks, NBFCs and other Regulated Entities (REs) may provide relief to borrowers impacted by natural calamities or similar external events. The framework enables REs to extend resolution plans to eligible borrowers, while permitting retention of standard asset classification and lower provisioning, benefits that would otherwise not be available if such restructuring were undertaken under the normal IRACP framework.

It may be noted that earlier RBI had issued guidelines for banks in connection with matters relating to relief measures to be provided in areas affected by natural calamities consolidated under ‘Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs’ dated October 17, 2018. In 2016, these guidelines were made applicable, mutatis mutandis, to all NBFCs as well, in areas affected by natural calamities as identified for implementation of suitable relief measures by the institutional framework viz., District Consultative Committee (DCCs)/ State Level Bankers’ Committee (SLBCs). However, given that the provisions were drafted considering the banking operations, the implementation by NBFCs was ambiguous and the provisions were often overlooked.

While the proposed framework applies to both banks (Commercial, RRB, Local area banks etc) and NBFCs, there are separate draft Directions issued for each RE. In case of banks the provisions carry additional system-level and public service responsibilities, reflecting their role within SLBCs and DCCs.

Fig 1:  Actionables for NBFCs under the draft directions

Applicability and process flow

The draft directions are proposed to come into effect from 1 April 2026, after the final directions are notified. The framework is triggered upon formal notification of a natural calamity by the Central Government or the concerned State Government.

Where a calamity affects a substantial part of a State, it is proposed that a special meeting of the SLBC  shall be convened within 15 days of such declaration. If the impact is confined to one or more districts, the corresponding DCC(s) are required to meet within the same timeframe. These committees assess the severity of the impact on economic activity, determine objective criteria for identifying impacted borrowers and indicate the nature and extent of relief such as moratoriums that may be extended by regulated entities operating in the affected areas. The decisions taken in these meetings are communicated to regulated entities and are required to be given adequate publicity, primarily by banks, through field outreach and public communication. The relief framework becomes operational in line with such Government notifications and the decisions of the SLBC or DCC, as applicable.

Amendments in the Credit Policy

The draft directions propose that the REs update their credit policies to incorporate a structured and pre-defined framework for dealing with borrower stress arising from natural calamities. The credit policy is expected to provide for resolution in line with the provisions and to set out objective principles governing the terms of relief across different borrower segments and loan categories.

While the precise parameters may vary depending on the nature and severity of the calamity, the decisions of the SLBC/DCC/Governments, the credit policy is expected to lay down a consistent framework to be applied by the REs when extending relief. This includes identifying potential relief measures, specifying verifiable parameters for determining eligibility of borrowers and extent of relief and defining the delegation matrix for approval and implementation. The emphasis is on ensuring timely decision-making, particularly in relation to restructuring of existing exposures and sanction of additional finance.

Eligible Borrowers and Coverage

Relief under the draft Directions is proposed to be available only to borrowers who meet the prescribed eligibility conditions as on the date of occurrence of the natural calamity. To qualify, the borrower’s account must be classified as ‘Standard’ and must not be in default for more than 30 days with the concerned RE in respect of any facility. Other additional conditions may be laid down in the credit policy.

Borrowers who do not meet these conditions fall outside the scope of the calamity relief framework and may instead be considered for resolution under the applicable Resolution of Stressed Assets Directions. In such cases, however, the RE does not receive the benefit of standard asset classification or lower provisioning (see discussion below). The framework extends its shelter only to those borrowers who, till the moment the calamity struck, had kept their financial obligations substantially intact. The protection is not meant to rescue infirm credit, but to steady sound accounts momentarily shaken by forces beyond human control.

Resolution Plan and Permissible Relief Measures

Where a RE decides to extend relief, the resolution plan is to be structured based on an assessment of the borrower’s post-calamity viability. The draft Directions propose a range of relief measures, including rescheduling of repayments, grant of moratorium, and conversion of accrued or future interest into another credit facility. Regulated entities may also consider sanctioning additional or fresh finance to address temporary financial stress, subject to appropriate assessment of viability and credit risk.

Notably, the framework is enabling rather than mandatory. It does not require automatic restructuring of all eligible accounts, thereby allowing REs to exercise credit judgement while operating within the prescribed regulatory parameters.

Timelines for Invocation and Implementation

It is proposed that resolution under the framework must be invoked within 45 days from the date of declaration of the natural calamity, unless an extension is granted by the Regional Director or Officer-in-Charge of the Reserve Bank. This would mean that the aggrieved borrower must approach the lender and the terms of restructuring must be agreed between both of them within the said timeframe. Once invoked, the resolution plan must be implemented within 90 days from the date of invocation.

In practice, this means that following the Government notification and the SLBC or DCC meeting, typically held within the first 15 days from the notification, REs have a limited 30-day window to complete borrower identification, viability assessment, documentation and approval. Failure to adhere to these timelines results in loss of the regulatory benefits available under the framework.

Asset classification treatment

The most significant regulatory benefit under the proposed framework relates to asset classification. Where a resolution plan is implemented in compliance with the Directions, borrower accounts classified as ‘Standard’ may be retained as such upon implementation instead of facing any downgrade. Further, accounts that may have slipped into NPA status between the date of occurrence of the calamity and the implementation of the resolution plan are permitted to be upgraded to ‘Standard’ upon implementation. However, as per the ECL Policy of the RE, generally any restructuring would automatically be treated as a SICR and therefore, the staging may change and a higher ECL would be required to be provided on such restructuring which may nullify the benefit. 

After implementation, subsequent asset classification is governed by the applicable IRACP norms. The proposed framework also addresses cases of repeated restructuring. Where a borrower account is restructured again under these Directions before the reversal of additional provisions (see below), it may continue to be classified as ‘Standard’, subject to recognition of interest on a cash basis from the second restructuring onwards and maintenance of an additional specific provision of five per cent of the outstanding debt for each restructuring, subject to an overall ceiling of 100 per cent.

Income Recognition and Provisioning

For restructured accounts, it is proposed that interest income may be recognised on an accrual basis. At the same time, REs are required to maintain an additional specific provision of 5% of the outstanding debt, over and above the applicable provisioning under IRACP norms. Reversal of this additional provision can happen only where the borrower repays at least 20% of the outstanding debt, the account does not slip into NPA status after implementation of the restructuring and no further restructuring is undertaken during the relevant period. Specifically for banks, if the outstanding debt post-restructuring is only in the form of non-fund-based facilities or facilities in the nature of cash credit / overdraft, the additional provisions can be reversed after one year, post implementation of the restructuring, provided the borrower was not in default at any point of time during the period concerned.

Ancillary relief measures and government support

It is proposed that the REs be required to extend interest subvention or prompt repayment incentive benefits notified by the Government to all eligible borrowers. They must also ensure that any relief already provided, or being provided, by the Central or State Governments is duly factored into the resolution process.

For agricultural loans secured by land, the draft Directions propose acceptance of certificates issued by Revenue Department officials where original title documents have been lost due to the calamity. In areas governed by community ownership arrangements, certificates issued by competent community authorities may also be accepted. REs may also, at their discretion, provide additional relief such as waiver or reduction of fees and charges for borrowers in affected areas, for a period not exceeding one year. Expected proceeds from insurance policies may also be kept while deciding the relief. Additionally for banks it is proposed that they shall open small accounts for displaced borrowers and take immediate action to restore ATM services in the impacted areas. They may operate their natural calamity affected branches from temporary premises under advice to the RBI. For continuing the temporary premise beyond 30 days, banks may obtain specific approval from the concerned Regional Office of RBI. A bank shall also make arrangements to render banking services in the affected areas by setting up satellite offices, extension counters or mobile banking facilities etc. under intimation to the RBI.

Reporting Requirements

It is proposed that the REs shall upload data on relief measures extended under the framework in the prescribed format on a half-yearly basis. The data points include ‘Outstanding eligible for restructuring as on the date of notification of natural calamity’, ‘Credit facilities restructured/rescheduled during the half year’, ‘Additional/fresh loans provided to affected borrowers during the half year’ etc.  The data must be submitted within 30 days from the end of each half-year, i.e., as of 30 September and 31 March, through the CIMS portal. Where no relief measures are extended during a reporting period, a NIL statement is required to be submitted.

See our other resources:

  1. COVID- 19 AND THE SHUT DOWN: THE IMPACT OF FORCE MAJEURE
  2. RBI Trade Relief Directions: How is your company impacted?

Buyback taxation rationalised with limited relief to promoter shareholders

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– Finance Bill 2026 omits deemed dividend treatment on buyback consideration 

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Our quick bytes on Union Budget 2026 can be accessed here – https://vinodkothari.com/2026/02/quick-bytes-on-union-budget-2026/

The recent Finance Bill 2026 brings relief to investors in the form of changes in taxation for buyback consideration. With the omission of sub-clause (f) from Section 2(40) of the Income Tax Act, 2025 [dealing with deemed dividend], the position as it existed prior to 1st October, 2024, has been restored, except for additional tax rates in case of promoter shareholders. 

  • Applicability of the amended provisions 
    • For any buyback of shares on or after 1st April, 2026 
  • Existing provisions on taxability of buyback 
    • Included u/s 2(40)(f) of IT Act 
    • The entire amount paid by the company taxable as “dividend” 
    • Tax payable by shareholders 
    • Entire buyback consideration taxable as dividend 
    • TDS provisions as applicable to dividends apply 
    • Taxable at slab rates as applicable to respective shareholders, with a flat surcharge @ 15%
    • Entire cost of acquisition in respect of shares bought back to be booked as “capital loss” [section 69 of IT Act]
    • Such capital loss may be set off against capital gains subsequently
      • As per section 111 of IT Act, the set-off is available for a period of 8 AYs immediately after the AY in which loss arises 
  • Amended provisions on taxability of buyback 
    • Buyback consideration not to be treated as deemed dividend [omission of clause (f) to Sec 2(40)]
    • Difference between consideration received and cost of acquisition taxable as capital gains [S. 69(1)]
      • In the hands of the recipient shareholder
    • In case of promoter shareholders, tax payable at higher rates depending on whether promoter is a domestic company or not
      • Effective rate of 22% in case of domestic company and 30% in case of persons other than domestic company 
  • Meaning of promoter 
    • In case of a listed company,
      • As per Reg 2(1)(k) of SEBI (Buy-Back of Securities) Regulations, 2018
        • Refers to the definition of promoter under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 
    • In any other case
      • As per Section 2(69) of the Companies Act, 2013, or 
      • A person who holds, directly or indirectly, more than 10% of the shareholding in the company
  • Example to understand taxability under old regime v/s new regime 
Particulars Price per shareNo. of shares Amount (Rs.)
Total cost of acquisition Rs. 50 1005,000
Shares tendered and accepted for buybackRs. 80403,200
Tax under old regime (effective 1st Oct, 2024)Rs. 80403,200 as dividend @ applicable tax slabs
Tax under new regime (effective 1st Apr, 2026)Rs. (80-50) = Rs. 30401,200 as capital gains @ short-term/ long-term capital gain rates 
  • Intent of the amendments 
    • The extant tax regime on treating buyback consideration as deemed dividend resulted in taxing a “receipt” as income, without factoring the cost incurred in such receipts. See our article on the same here. The amended tax regime restores back the past position, by treating the difference between the buyback consideration and cost of acquisition as capital gains. 
    • Additional tax rates have been proposed for promoters, in view of the distinct position
    • and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions.

See our other resources on buyback – https://vinodkothari.com/2024/08/resource-centre-on-buyback/

Quick Bytes on Union Budget 2026

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Our Resources

  1. Buyback taxation rationalised with limited relief to promoter shareholders
  2. State of Climate Finance: Domestic Resources Insufficient to Bridge Funding Gaps 
  3. Microfinance and NBFC-MFIs in Economic Survey 2026
  4. Economic Survey 2026: Key Insights on Infrastructure Financing

Economic Survey 2026: Key Insights on Infrastructure Financing

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Simrat Singh | finserv@vinodkothari.com

This year’s Economic Survey focuses less on the expansion of credit and more on the quality and sustainability of credit. In infrastructure financing for instance, the Survey notes that the emphasis shifts from the sheer scale of investment to project quality and risk allocation. In this short note, we explore major observations of the Survey w.r.t infrastructure financing and microfinance. 

Infrastructure financing

The Survey 2026 treats infrastructure financing not as a question of “how much more to spend, but how to finance better.” The message is clear: public capital expenditure will continue to lead, but the future of infrastructure finance lies in diversification and market-based instruments, with InvITs and REITs playing a pivotal role.

Public capex still has the lion’s share

The Survey firmly reaffirms public capital expenditure as the backbone of India’s infrastructure push. Government capital expenditure has nearly doubled between FY22 and FY26, underscoring the public sector’s continued leadership in financing infrastructure.

At the same time, the Survey highlights why high public spending alone is not sufficient. Weak project preparation, delays in statutory clearances and rigid contracting structures are identified as key contributors to financial stress in infrastructure projects. The underlying message being that better-prepared projects attract better financing. Public expenditure must increasingly focus on de-risking projects upfront, rather than merely funding asset creation.

Moving away from bank-dominated financing

A gradual move away from infrastructure financing being overly dependent on bank credit is observed. While banks remain important, the Survey recognises the limits of using short-term deposits to fund long-gestation infrastructure assets. Instead, financing growth is increasingly coming from:

  1. NBFCs;
  2. Capital markets;
  3. Pooled investment vehicles such as InvITs and REITs

This shift is seen as essential to reduce systemic risk and prevent a repeat of infrastructure-led stress on bank balance sheets.

Infrastructure Investment Trusts

InvITs are no longer presented as a niche product. The Survey positions them as core infrastructure financing institutions, especially for mature, revenue-generating assets.

Their role is threefold:

  1. Attract long-term institutional capital such as pension and insurance funds;
  2. Remove operational assets from bank balance sheets, reducing asset-liability mismatches;
  3. Enable asset recycling, freeing capital for new infrastructure creation.

Importantly, the Survey sees InvITs less as tools for raising fresh debt for infrastructure spending and more as mechanisms for capital rotation i.e. monetising what is already built to finance what needs to be built next.

InvITs and PPPs: Financing the second half of the project life

The Survey draws a quiet but important distinction between greenfield and brownfield risk. While banks still dominate construction-stage financing, InvITs have become the preferred vehicle for post-construction assets, particularly in roads, power transmission, ports, and telecom. Majorly due to the regulatory requirement of having at least 80% completed and revenue generating assets.

This has strengthened PPP outcomes by:

  1. Providing exits to developers; 
  2. Improving liquidity in infrastructure markets;
  3. Making infrastructure a credible asset class for long-term investors

The proposed launch of the first government-owned public InvIT in 2026 signals the government’s intent to embed InvITs deeper into public asset management, not just private monetisation.

Regulation catching up with financing reality

Supporting this transition, the Survey recognises important regulatory reforms for infrastructure financing such as:

  1. RBI’s Project Finance Directions, 2025 (now subsumed into Credit Facilities Directions), which improve stress recognition, align infrastructure definition and prevent evergreening by introducing stage-based disbursal of funds etc. (Our video explaining the project finance directions can be accessed here and our article on the same can be accessed here);
  2. SEBI’s Small and Medium REIT (SM REIT) framework which has lowered the minimum asset size threshold from ₹500 crore to ₹50 crore and introduced a scheme-based structure, allowing multiple sub-₹500 crore asset pools to be housed within a single SM REIT which expands the universe of monetisable real estate assets and facilitates the participation of smaller, stabilised commercial properties in regulated pooled vehicles.
  3. From 1 January 2026, SEBI has classified Mutual Fund and Specialised Investment Fund (SIF) investments in REITs as equity-related instruments. A move which would introduce much needed liquidity in the REIT space.

What the Survey does and does not claim

The Survey is careful not to oversell InvITs. They are not substitutes for public capex, nor solutions for early-stage project risk. Their success depends on stable cash flows and regulatory certainty. But within those limits, InvITs represent a correction in India’s infrastructure finance model, one that shifts risk away from bank balance sheets and towards diverse long-term capital aligned with infrastructure economics.

Read our other resources

Climate Finance: domestic resources insufficient to bridge funding gaps

Microfinance and NBFC-MFIs in Economic Survey 2026

Microfinance and NBFC-MFIs in Economic Survey 2026

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Simrat Singh | finserv@vinodkothari.com

The Economic Survey 2026 takes an honest view of India’s microfinance sector. Rather than celebrating credit growth alone, it frames microfinance as a household balance-sheet business, where the real test of success is whether borrowing improves stability and resilience at the last mile or not. NBFC-MFIs, as the primary delivery channel, sit at the heart of this assessment. In this short note, we explore major observations of the Survey w.r.t infrastructure financing and microfinance.

Microfinance remains central to financial inclusion

The Survey reiterates the importance of microfinance in extending formal credit to underserved households. Women account for the vast majority of borrowers and most lending continues to be rural. Over the past decade, the sector has expanded rapidly in both outreach and scale, with NBFC-MFIs accounting for the largest share of lending, followed by banks and small finance banks.

This expansion has made microfinance one of the most effective channels for last-mile credit delivery but it has also exposed the sector to sharper credit cycles.

Recent stress reflects excess lending, not weak demand

The slowdown seen in FY25 is presented as a supply-side correction rather than a failure of the model. The Survey attributes the stress primarily to over-lending and borrower over-indebtedness in certain regions, driven by multiple lenders targeting the same customer base after the pandemic. The key takeaway being that access to credit was not the constraint credit discipline was.

NBFC-MFIs: essential but cycle-prone

NBFC-MFIs remain indispensable to microfinance, but the Survey recognises their structural vulnerability during rapid growth phases. Unsecured lending and limited visibility into borrowers’ total debt make the model sensitive to concentration risks. Regulatory responses have therefore focused on restoring balance rather than tightening credit indiscriminately. The RBI’s decision to lower the minimum qualifying asset requirement has given NBFC-MFIs room to diversify, while self-regulatory measures have reinforced borrower-level safeguards. The Survey notes early signs of stabilisation in asset quality and disbursement trends.

The core challenge: understanding the borrower better

A recurring concern in the Survey is the lack of reliable tools to assess household income and repayment capacity. Many borrowers carry obligations beyond microfinance such as gold loans or agricultural credit that are not always visible at the point of lending. The Survey sees digital public infrastructure as a gradual solution. Wider use of digital payments, data sharing frameworks and account aggregators is expected to improve cash-flow assessment and reduce reliance on informal income proxies. Using all this information about its borrowers, the MFIs are expected to improve their credit assessment.

Rethinking what “impact” really means

One of the Survey’s most important observations is its critique of how success in microfinance is measured. While private capital has helped scale the sector, growth-centric metrics can unintentionally encourage repeated lending without sufficient regard for borrower outcomes. The Survey argues for a shift towards welfare-oriented indicators such as income stability, reduction in distress borrowing and sustainable debt levels rather than portfolio size alone. In doing so, it challenges the assumption that more credit automatically translates into better outcomes.

What the Survey ultimately says

The Survey neither dismisses microfinance nor romanticises it. It acknowledges its critical role in inclusion, while warning that unchecked expansion can weaken household balance sheets. Long-term sustainability, it suggests, depends less on how fast credit grows and more on how responsibly it is delivered. The Economic Survey’s message is simple: the future of microfinance lies in lending better, not lending more. For NBFC-MFIs, this means aligning growth with borrower capacity, using data more intelligently and treating household stability, not loan volumes, as the true measure of success.

Read our other resources

Climate Finance: domestic resources insufficient to bridge funding gaps

State of Climate Finance: Domestic Resources Insufficient to Bridge Funding Gaps 

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Economic Survey 2025-26 highlights the position of climate finance in India and developing countries 

Anushka Ganguly, Executive | corplaw@vinodkothari.com

The relevance of climate finance in climate action cannot be undermined, since climate change mitigation and adaptation require large-scale mobilisation of financial resources. The Economic Survey 2025-26, tabled in Parliament by Union Finance Minister Nirmala Sitharaman on January 29, 2026, highlights that the current climate finance levels are inadequate for developing countries to achieve their climate goals. This climate funding gap is not a lack of ambition, rather, is imbibed in the structural weaknesses of the international financial system. 

  1. Climate Finance gap in India and other developing countries

By 2030, developing economies are estimated to need USD 5–6 trillion1 for effective climate action. With that in mind, the following may be noted:

  • Despite global efforts, developing countries continue to face a significant funding gap of around USD 4 trillion annually for sustainable development, as highlighted at the Fourth International Conference on Financing for Development (Compromiso de Sevilla)2.
  • Climate finance in India remains skewed towards only the mature sectors such as solar, wind energy and energy efficiency.
  • Critical areas, including adaptation, financing for micro, small, and medium enterprises (MSMEs), urban infrastructure, and hard-to-abate industries, remain underfunded.

1.1.  Challenges in mobilising private capital for climate finance 

In 2023, global financial assets under management totalled USD 1.9 trillion, with private capital accounting for nearly USD 1.3 trillion3. Most of this private capital went to advanced economies, with China receiving another 30%, whereas other developing countries, excluding China, received merely around 15%. The reasons for such a gap include: 

  • Developing countries, being more vulnerable to climate change, face higher borrowing costs owing to currency volatility, lower sovereign credit ratings, and financial systems that lack depth.
  • Most of the abundant global capital flows to developed economies with stronger financial markets and economies that pose minimal risks. 
  • Investors often hesitate to finance climate resilience projects in developing countries.
  1. Policy Initiatives towards bridging the Finance Gap 

While the overall progress of the country towards the climate goals remain insufficient4, India has, over years, through policy initiatives and regulatory reforms, have mobilised climate finance to the extent that has  resulted in a 36% reduction in emissions intensity since 2005 and achieved 50% non-fossil power capacity ahead of schedule. The policy initiatives taken include the following:

  • Allowing 100% foreign direct investment in renewable energy projects.
  • Implementing SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework, green bond guidelines. [Refer to our BRSR resource centre]
  • Provision of credit lines and financing for climate-related investments by Development finance institutions in India, including IREDA, NABARD, SIDBI, PFC, and REC.
  • Issuance of Sovereign Green Bonds to fund low-carbon public infrastructure, providing policy signalling and market benchmarks. [Refer to our article on SGBs here]
  • Introduction of green deposit framework by RBI that optimises the flow of credit to green activities/projects by channelising institutional and household savings, with guardrails in place to overcome greenwashing challenges. [Refer to our article on green deposits here]
  • Incorporating risk mitigation, reconstruction, and recovery, as well as prevention, under the State Disaster Mitigation Fund (SDMF) and the National Disaster Mitigation Fund (NDMF), institutionalised as part of the Disaster Management Act 2005.
  • Implementation of Glacial Lake Outburst Flood Mitigation Programme approved under NDMF to monitor glaciers and glacial lakes in the Indian Himalayan region.

2.1. Bridging the gap domestically

Currently, around 83 per cent of India’s finance for mitigation and 98 per cent of finance for adaptation is sourced domestically, reflecting strong internal financing. While relying solely on domestic resources is insufficient to meet India’s overall climate investment needs, some steps towards strengthening the domestic financial system may include: 

  • Issuing municipal green bonds can unlock USD 2.5–6.9 billion for local bodies driven climate action over the next 5–10 years. 
  • Strengthening the financial ecosystem through the mobilisation of blended finance, de-risking of projects, and capacity building through technical assistance and training through specialised development finance institutions like IREDA, NABARD, SIDBI, PFC, and REC can play a critical role in advancing India’s climate finance landscape by supporting low-carbon and renewable energy projects.
  • Extending insurance coverage to safeguard people against economic losses associated with the physical risks of climate change, and improving the creditworthiness of climate-exposed borrowers such as farmers and MSMEs.

Conclusion

There is a wide disparity between the climate vulnerability and the funds available towards supporting the climate action. While policy incentives are being shaped towards mobilising domestic finance, an effective global response is required, particularly towards the developing countries. The global capital allocation needs to be mobilised towards areas where the investment needs for sustainable development are most pressing.

See our other resources:

  1. Microfinance and NBFC-MFIs in Economic Survey 2026
  2. Economic Survey 2026: Key Insights on Infrastructure Financing
  3. Resources on Sustainability Finance
  4. Resource Center on ESG and sustainability
  1. UNFCCC (2024, September 10). Second report on the determination of the needs of developing country Parties related to implementing the Convention and the Paris Agreement: https://unfccc.int/documents/64075 ↩︎
  2. UNDESA. Sevilla Commitment Fourth International Conference on Financing for Development: https://financing.desa.un.org/sites/default/files/2025-11/FFD4%20Outcome%20Booklet%20v5_EN_Digital%205.5×8.5.pdf ↩︎
  3. Climate Policy Initiative. 2025. Global Landscape of Climate Finance 2025: https://www.climatepolicyinitiative.org/wp-content/uploads/2000/06/compressed_Global-Landscape-of-Climate-Finance-2025.pdf
    ↩︎
  4. https://climateactiontracker.org/countries/india/net-zero-targets/ ↩︎

Representation with respect to NBFC-related Regulatory Issues

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The Pre-Summit workshop dated 28th May, 2026 is Sold Out! We have announce a repeat workshop on 27th May, 2026. Register your interest now before the seats fill up again!

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