SEBI Securitisation Regulations: Track Record, Risk retention and Investment size among several new requirements
– Dayita Kanodia (finserv@vinodkothari.com)
Requirements to apply to all listed issuances, from financial and non-financial issuers
Below are the major highlights of the SDI amendment regulations:
SEBI on May 5, 2025 has issued the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) (Amendment) Regulations. 2025. It may be noted that the SDI Regulations, was first notified on 26th May, 2008, after public consultation on the proposed regulatory structure with respect to public offer and listing of SDIs, following the amendments made in the SCRA. The Regulations, originally referred to as the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, were subsequently renamed as SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, w.e.f. 26th June, 2018.
In order to ensure that the regulatory framework remains in accordance with the recent developments in the securitisation market, a working group chaired by Mr. Vinod Kothari was formed to suggest changes to the 2008 SDI regulations. Based on the suggestions of the working group and deliberations of SEBI with RBI, the amendment has been issued. The amendment primarily aims to align the SEBI norms for Securitised Debt Instruments (SDIs) with that of the RBI SSA Directions which only applies in case of securitisations undertaken by RBI regulated entities.
It can be said that these amendments are not in conflict with the SSA Directions and therefore for financial sector entities while there may be some additional compliance requirements if the securitisation notes are listed, there are as such no pain points which discourages such entities to go for listing. Further, certain requirements such as MRR, MHP, minimum ticket size have only been mandated for public issue of SDIs and therefore are not applicable in case of privately placed SDIs.
This article discusses the major amendments in the SDI Framework.
Major Changes
Definition of debt
The amendment makes the following changes to the definition of debt:
- All financial assets now covered – In order to align the SDI Regulations with the RBI SSA Directions, the definition of ‘debt’ has been amended to cover all financial assets as permitted to be originated by an RBI regulated originator. Further, this is subject to the such classes of assets and receivables as are permissible under the RBI Directions. Note that the RBI SSA Directions does not provide a definition of ‘debt’ or ‘receivables’, however, provides a negative list of assets that cannot be securitised under Para 6(d) of the RBI SSA Directions.
- Equipment leasing receivables, rental receivables now covered under the definition of debt.
- Listed debt securities – The explicit mention of ‘listed’ debt securities may remove the ambiguity with regard to whether SDIs can be issued backed by underlying unlisted debt securities, and limits the same to only listed debt securities. The second proviso to the definition further clarifies that unlisted debt securities are not permitted as an underlying for the SDIs.
- Trade receivables (arising from bills or invoices duly accepted by the obligors) – As regards securitisation of trade receivables, acceptance of bills or invoices is a pre-condition for eligibility of the same as a debt under the SDI Regulations.
‘Acceptance’, in literal terms, would mean acknowledgement of the existence of receivables. Under the Negotiable Instruments Act, 1881, ‘acceptance’ is not defined, however, ‘acceptor’ is defined to mean the drawee of a bill having signed his assent upon the bill, and delivered the same, or given notice of such signing to the holder or to some person on his behalf.
Note that a bill or invoice may either be a hard copy or in digital form. In the context of digital bill, acceptance through signature is not possible; therefore, existence of no disputes indicating a non-acceptance, should be considered as a valid acceptance.
- Such Debt/ receivable including sustainable SDIs as may be notified by SEBI – In addition to the forms of debts covered under the SDI Regulations, powers have been reserved with SEBI to specify other forms or nature of debt/ receivable as may be covered under the aforesaid definition. Further, the clause explicitly refers to sustainable SDIs, for which a consultation had been initiated by SEBI in August 2024[1].
Conditions governing securitisation
SEBI has mandated the following conditions to be met for securitisation under the SDI Framework:
- No single obligor to constitute more than 25% of the asset pool – This condition has been mandated with a view to ensure appropriate diversification of the asset pool so that risk is not concentrated with only a few obligors. However, it may be noted here that the RBI regulations does not currently prescribe any such obligor concentration condition. Only in case of Simple, Transparent and Comparable securitisation transactions, there is a mandate requiring a maximum concentration of 2% of the pool for each obligor.
However, SEBI has retained the power to relax this condition. In our view, this may be relaxed by SEBI for RBI regulated entities considering that RBI does not prescribe for any such condition.
- All assets to be homogenous – This is yet another provision which is only required by RBI in case of STC transactions. However, even in the context of RBI regulations, what exactly constitutes a homogenous asset is mostly a subjective test. SEBI has defined homogenous to mean same or similar risk or return profile arising from the proposed underlying for a securitised debt instrument. This has made the test of homogeneity even more subjective. For the purpose of determining homogeneity, reference can be made to the homogeneity parameters laid out by RBI in case of Simple, Transparent and Comparable securitization transactions.
- SDIs will need to be fully paid up- The SDIs will need to be fully paid up, i.e., partly paid up SDIs cannot be securitised.
- Originators to have a track record of 3 financial years: Originators should be in the same business of originating the receivables being securitised for a period of at least three financial years. This restricts new entities from securitising their receivables. However, this condition in our view should only apply to business entities other than business entities, complying with this condition does not seem feasible.
- Obligors to have a track record of 3 financial years– The intent behind this seems to to reduce the risk associated with the transaction as the obligors having a track record in the same operations which resulted in the creation of receivables being securitized. However, this condition cannot be met in most types of future flow securitisation transactions such as toll road receivables and receivables from music royalties.
SEBI has made it clear that the last two conditions of maintenance of track record of 3 years for originators and obligors will not apply in case of transactions where the originators is an RBI regulated entity.
Amendments only applicable in case of public issue of SDIs
The following amendments will only be applicable if the SDIs are issued to the public. Here, it may be noted that the maximum number of investors in case of private placement of SDIs is limited to 50.
Minimum Ticket Size
The Erstwhile SDI Regulations did not provide for any minimum ticket size. However, with a view to align the SDI regulations with that of RBI’s SSA Direction, a minimum ticket size of Rs. 1 crore has been mandated in case of originators which are RBI regulated as well as of non-RBI regulated entities. It may however be noted that the minimum ticket size requirement has only been introduced in case of public offer of SDIs. Further, in cases with SDIs having listed securities as underlying, the minimum ticket size shall be the face value of such listed security.
Securitisation is generally perceived as a sophisticated and complex structure and therefore the regulators are not comfortable in making the same available to the retail investors. Accordingly, a minimum ticket size of Rs. 1 Crore has been mandated for public issue of SDIs. In case of privately placed SDIs, the issuer will therefore have the discretion to decide on the minimum ticket size. However, since the RBI also mandates a minimum ticket size of Rs. 1 Crore, financial sector entities will need to adhere to the same.
Here, it is also important to note that in case of public issue of SDIs with respect to originators not regulated by RBI, SEBI has made it clear that the minimum ticket size of Rs. 1 Crore should be seen both at initial subscription as well as at the time of subsequent transfers of SDIs. However, nothing has been said for subsequent transfers in cases where the originator is a RBI regulated entity. The RBI SSA Directions also requires such minimum ticket size of Rs. 1 Crore to be seen only at the time of initial subscription. This in many cases led to the securitisation notes being broken down into smaller amounts in the secondary market.
In the absence of anything mentioned for RBI regulated entities, it can be said that there is no change with respect to the ticket size for RBI regulated entities even in the case of publicly issued SDIs which should be seen only at the time of initial subscription.
It is worth mentioning that under the SSA Directions of RBI requires that in case of transactions carried out outside of the SSA Directions (the transactions undertaken by non-RBI regulated entities), the investors which are regulated by RBI have to maintain full capital charge. This therefore discourages Banks from investing in securitisation transactions which are carried out outside the ambit of the SSA Directions. Therefore, both retail investors as well RBI regulated entities will not be the investors which will hinder liquidity and overall growth of the SDI market.
Minimum Risk Retention
Aligning with RBI’s SSA Direction, a Minimum Risk Retention (MRR) requirement for public issue of SDIs has been mandated requiring retention by the originator of a minimum of
- 5% in case the residual maturity of the underlying loans is upto 24 months and
- 10% in case residual maturity is more than 24 months
Further, in case of RMBS transactions, the MRR has been kept at 5% irrespective of the original tenure.
SEBI has aligned the entire MRR conditions with that of the RBI SSA Directions, including the quantum and form of maintenance of MRR. Accordingly, for financial sector entities, there is no change with respect to MRR.
By introducing MRR in the SDI Regulations, non-financial sector entities will be held to similar standards of accountability, skin-in-the-game, reducing the risks associated with the originate-to-sell model and aligning their practices with those of financial sector originators. This will strengthen investor confidence across the board and mitigate risks of moral hazard or lax underwriting standards.
It may however be noted here that in case of non financial originators, there could be situations where retention is being maintained in some form (for example in leasing transactions, the residual value of the leased assets continues to be held by the originator) and therefore such originators will be required to hold MRR in addition to the retention maintained.
Minimum Holding Period
SEBI has aligned the MHP conditions as prescribed under the SSA directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. For receivables other than loans, the MHP condition will be specified by SEBI.
Exercise of Clean up Call option by the originator
The provisions for the exercise of the clean up call option has been aligned with those prescribed under the SSA Directions. The option to exercise a clean up call has only been provided in case of public issue of SDIs. There however does not seem any reasonable justification for not providing such a clean up call option in case of private placement of SDIs.
Since, the RBI permits exercise of clean up call options, in our view for RBI regulated entities such an option will also be available even after listing of the SDIs on a private placement basis.
Other Amendments
- Norms for liquidity facility aligned with that of RBI regulations
- All references to the Companies Act 1956 has been changed to Companies Act 2013
- Chapter on registration of trustees has been removed and reference has been made to SEBI (Debenture Trustees) Regulations, 1993
- Disclosure requirements for the originator and the SPDE have been prescribed; however the disclosure formats are yet to be issued by SEBI.
- Public offer of SDIs to remain open for a minimum period of 2 working days and upto a maximum of 10 working days.
Amendments proposed in the SEBI(LODR) Regulations
There are primarily two regulations which govern the listing of SDIs:
- SEBI SDI Regulations
- SEBI LODR Regulations
The following amendments have been proposed in the LODR regulations:
- SCORES registration to be taken at the trustee level
- Outstanding litigations, any material developments in relation to the originator or servicer or any other party to the transaction which could be prejudicial to the interests of the investors to be disclosed on an annual basis.
- Servicing related defaults to be disclosed on an annual basis.
[1] Read an article on the concept of sustainable SDIs at – https://vinodkothari.com/2024/09/sustainable-securitisation-the-next-in-filling-sustainable-finance-gap-in-india
RBI revamps Master Directions on Compounding under FEMA
– Prapti Kanakia | corplaw@vinodkothari.com
Other related resources:
- Powers of RBI Officers enhanced for compounding FEMA offences
- Note on Compounding of Contraventions under FEMA
- RBI aligns list of compoundable contraventions under FEMA with NDI Rules
- ODI Compliances, Contraventions & Compounding under FEMA
- Yotube Series – Familiar with FEMA
Presentation on a Can of “Cannots”: Redefining Secretarial Audits
– Payal Agarwal, Partner | corplaw@vinodkothari.com
See our webinar on the same here: https://youtu.be/quOA5A9G0II
Secretarial auditors for listed entities: FAQs on disqualifications and prohibited services
FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations,2024
Misplaced exemptions in the RPT framework for HVDLEs
Nitu Poddar, Partner | corplaw@vinodkothari.com
After over two years of implementing CG norms for HVDLE on a ‘comply or explain’ basis, a new Chapter VA has been inserted in the LODR on March 28, 2025, governing CG norms for pure HVDLEs. Among other things, the new chapter outlines the requirements relating to board and committee composition, subsidiary governance, RPT framework for HVDLEs, etc.
As regards the RPT framework, the one for HVDLE (reg 62K) introduces an additional requirement: consent from debenture holders through NOC from the debenture trustees.
This criteria has been added to fix the “impossibility of compliance” (of getting approval from unrelated shareholders for material RPTs) in case of HVDLEs as most of these have either nil or negligible unrelated shareholders. This also underscores the requirement to protect the interest of the lenders, particularly the debenture holders – aligned with s. 186(5) of the Companies Act, 2013.
However, there are a few practical implementation issues and inconsistencies, possibly arising from the CG norms (prior to the LODR 3rd Amendment in 2024) for an equity listed entity (chapter IV) being the drafting template for this new chapter. This article highlights these issues, particularly those affecting 62K, given the structure of HVDLEs.
Structural difference between HVDLE and an equity listed company
Before beginning to list such inconsistencies, it is important to highlight the structural difference between an HVDLE and an equity listed company – the very reason why a separate chapter for CG has been rolled out for an HVDLE!
HVDLEs are mostly closely held companies with all or close to all shareholders being related parties, approval from unrelated shareholders often becomes an impossibility. Further, considering that the funding to HVDLEs is by the debenture holders, protection of their interest becomes paramount. Accordingly, approval from the debenture holders have been made mandatory for undertaking any material RPTs by a HVDLE.
13.3.3 Since, both banks and debenture holders are lenders to the borrowing entity, it is felt that a similar approach should be adopted for debenture holders. This provides a layer of protection to the debenture holders who might be at risk of unfair treatment due to some RPTs which may also have an impact on the repayment capability of an entity. It is noted that the debenture holders’ interest is intended to be safeguarded by a debenture trustee [SEBI Consultation Paper date October 31, 2024]
Present exemptions – some extra; some missing
Lets now discuss the inconsistencies that needs to be fixed:
- Grant of exemptions w.r.t transaction between holding company and its wholly-owned subsidiaries and among WOS does not place well with HVDLEs.
The shareholders of the holding and its WOS are effectively the same and any benefit / resources, if at all transferred to the WOS, in case of an RPT between a holding and WOS, is to consolidate in the holding company and remain within the enterprise. Therefore, such transactions are exempted u/r 23(5). But this theory holds correct in case of an equity listed company only where the interest of equity shareholders needs to be protected.
However, in a debt-listed structure, the concern shifts from the ‘enterprise’ to the individual ‘entity’. The exposure of debenture holders is required to be protected. A debenture holder may have exposure only to the WOS, not the holding company. In such case, exempting RPTs between the holding company and its WOS (or between two WOS) overlooks the distinct legal and financial obligations of each entity. The interest of debenture holder can be considered only by seeking “their” approval for a RPT. The relationship of holding company and WOS between the transacting company does not ensure any protection to the debenture holders. The exemption in 62K(7), mirroring 23(5), places debenture holders at the mercy of equity shareholders in the holding company – contradicting the spirit of the rest of Regulation 62K, which otherwise mandates their approval.
Think of a situation where a WOS (which has issued the debentures) upstreams value to its parent. While equity shareholders in the parent may remain unaffected, the WOS may be left with insufficient resources to repay its debenture obligations. Debenture holders cannot claim recourse against the parent; their exposure is limited to the WOS.
- Exemptions in reg 23 brought through LODR 3rd amendment viz. w.r.t remuneration to KMPs and SMPs who are not promoters etc is missing in Reg 62K
Remuneration paid to KMP and SMP who are not promoters, payment of statutory dues, transactions between PSU and CG / SG which are exempted for an equity listed entity have not been replicated under 62K. There is no reason why these exemptions which are provided to an equity listed entity, shall not be provided to an HVDLE, when the underlying intent of these exemptions aligns with an HVDLE.
Our related resources on the topic:
Ongoing Projects, Unspent Funds, and the April 30 Countdown
– Sourish Kundu, Executive | corplaw@vinodkothari.com
Every year, as companies close their books on 31st March, a silent timer begins ticking — one that could turn a minor delay into a major compliance miss. 30th April isn’t just another date on the calendar; it’s a hard stop for companies to take action regarding their unspent CSR (Corporate Social Responsibility) obligations.
Why 30th April? What must you do? What if you don’t? Let’s walk through it — step by step.
Why 30th April?
In terms of Section 135(6) of the Companies Act, 2013:
“Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account in any scheduled bank called the ‘Unspent Corporate Social Responsibility Account.'”
Thus, by 30th April, companies must transfer unspent CSR amounts related to ongoing projects into a special CSR account.
What Must Be Done by 30th April?
- Open a dedicated bank account titled “Unspent Corporate Social Responsibility Account FY [Year].”
- Transfer the unspent CSR amount related to ongoing projects into this account.
- Update the Board Report appropriately (explained below).
What If You Don’t Do It?
If the company:
- Fails to transfer the amount by 30th April — it’s a default under Section 135(6).
- Fails to spend the amount altogether — Section 135(5) steps in:
“If the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within six months of the expiry of the financial year.”
In short:
1. Unspent on non-ongoing projects? → Transfer to a Schedule VII Fund within 6 months of FY end (i.e., by 30th September).
2. Unspent on ongoing projects? → Transfer to Unspent CSR Account by 30th April, then spend it within 3 years, failing which again transfer to a Fund.
What is an Ongoing Project?
Rule 2(1)(i) of Amendment Rules defines the term ‘ongoing project’ as:
- a multi-year project, stretching over more than one financial year;
- having timeline not exceeding three years excluding the year of commencement
- includes such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.
The same should have commenced within the financial year to call it ‘ongoing’. This includes a project that was initially not approved as a multi-year project. The intent is to include a project which has an identifiable commencement and completion. The expenses which are recurring in nature should not be included in the ongoing project.
For example, if a company contributes to the annual running expense of a cancer hospital, the spending for the next year cannot be regarded as an “ongoing project”. However, if installation of a new facility at the same hospital is already undertaken during the year, such expense should be regarded as an “ongoing project”.
Board’s and Auditor’s Responsibility
- Board’s Responsibility: In the Board’s Report (Section 134(3)(o)), specify reasons for any unspent CSR amount.
- Auditor’s Responsibility under Rule 3 of CARO, 2020:
The auditor must specifically report:
- (xx)(a) whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII within 6 months of expiry of the financial year, in compliance with the second proviso to Section 135(5);
- (xx)(b) whether any amount remaining unspent pursuant to any ongoing project has been transferred to the Unspent CSR Account within 30 days from the end of the financial year, as required under Section 135(6).
Thus, both the Board and Auditor are responsible for ensuring, documenting, and reporting CSR compliance – and failure can attract regulatory scrutiny and penal consequences.
Read more:
Knowledge Centre for Corporate Social Responsibility (CSR)
Need for strategic vision in CSR spending by companies
Corporate law changes: small steps towards procedural simplification
RPTs: Wholly-owned but not wholly- exempt
– Application of RPT controls for transactions with Wholly owned Subsidiaries
– Payal Agarwal, Partner | corplaw@vinodkothari.com
Enterprise Level v/s Entity Level: Paradox of a Wholly owned Subsidiary
Wholly owned Subsidiaries (WoS) form a particular paradox in corporate laws with two contradictory positions – (a) the transactions entered into between the holding company and its WoS are viewed as transactions within a group, thus, permitting a seamless flow of resources between the two without any objection, looking at an “enterprise” level whereas, (b) limiting the access of the shareholders and creditors of the holding company and the WoS to the respective entity’s resources, thereby separation of the two at an “entity” level.
Disregarding ‘entity’ concept over ‘enterprise’ concept: exemptions w.r.t. WoS
Section 185 of CA 2013 exempts any financial assistance to the WoS from the compliance requirements under the section, and the limits on loans, guarantees, investments or provision of security under section 186 do not apply for transactions with WoS. Section 177(4)(iv) and 188 of CA 2013, pertaining to RPT controls, also extend certain exemptions for transactions with WoS. Reg 23(5) of SEBI LODR also exempts transactions with WoS as well as between two WoS from approval requirements, at both the Audit Committee and shareholders’ level. Reg 37A of SEBI LODR contains an exemption from shareholders’ approval requirements for sale, lease or disposal of an undertaking to the WoS. In each of the aforesaid provisions, the underlying presumption remains the same – the accounts of the WoS are consolidated with that of the holding company, and hence, the flow of resources remain within the same ‘enterprise’, despite change of ‘entity’. Thus the law takes an ‘enterprise’ wide view instead of an ‘entity’ level view while providing for such exemptions.
Factors reinforcing the concept of separation of entity
On the other hand, the outreach of shareholders of a company is limited at an ‘entity’ level, that is to say, the shareholders of the holding company do not have access to the general meetings of the WoS. Similarly, the creditors of each entity do not have any recourse against the other entity. For instance, where the holding company has outstanding dues, but there are resources at the WoS level, can the creditors reach to the assets of the WoS? The answer is no. Similarly, a vice versa situation is also not possible. In fact, under the Insolvency and Bankruptcy Code too, the assets of the subsidiary are kept outside the purview of the liquidation estate of the holding corporate debtor [Section 36(4)(d)].
Further, the board of a WoS is different from its holding company. The board of the holding company does not have any rights over the board of the subsidiary. Therefore, under these situations, transactions between the holding company and its WoS, though between companies that are 100% belonging to the same group, cannot be viewed as completely seamless or free from any corporate governance concerns.
RPTs between holding company and WoS: can the ‘enterprise’ approach be taken?
The aforesaid discussion makes it clear that while an ‘enterprise’ wide approach is taken in granting exemptions to WoS, the separation of legal entities cannot be completely disregarded, because the outreach of the shareholders, creditors and the board of directors remain limited. Now from the point of view of related party transactions, can it be argued that the transactions between a holding company and WoS are without any restraint altogether? For example, does the concept of arm’s length has no relevance in case of a transaction between a holding company and WoS?
Concept of arm’s length and relevance in transactions with WoS
A light touch regulation or inapplicability of certain controls or approvals does not mean that arm’s length precondition becomes unnecessary. If such a view is taken, then the flow of resources between the holding company and the WoS will be completely without any fetters, thus breaching the concept of corporate governance at an entity level. For instance, can the board of directors of the holding company be absolved from its responsibilities to safeguard the assets of the holding company where the same flows to the subsidiary without any consideration? The answer surely is a no. Both ‘entity’ level and ‘enterprise’ level are significant, and hence, one cannot disregard the separation of legal entities, particularly, in the context of protection of assets of the entity (also see discussion under Role of Board below).
As regards the concept of arm’s length, the same is omnipresent – required to be ensured in transactions with related parties as well as unrelated entities. The meaning of arm’s length transaction, as defined under SA 550 pertaining to Related Parties, is as follows:
A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.
Therefore, ‘independence’ and ‘own interests’ are important elements of an arm’s length transaction. If compromised in RPTs with WoS, absence of arm’s length criteria could lead to uncontrolled flow of wealth from the holding company to WoS, and may also lead to abusive RPTs.
Are WoS structures immune from abuse?: Deploying WoS as a stop-over for abusive RPTs
The exemptions w.r.t. transactions with WoS make the same prone to misuse, through use of the WoS as a conduit or a stop-over for giving effect to arrangements with non-exempt RPs. For instance, a listed entity in the FMCG sector is required to provide financial assistance to its upstream entities (promoter group entities). There may be a lack of business rationale and commercial justification for such a transaction, and therefore, it is highly unlikely that such a transaction would get the approval of the AC. Therefore, in order to give effect to the transaction, the company may route the same through its WoS, and thus escape RPT controls at its AC level. The WoS may, in turn, pass on the benefit to the promoter group entities, through a series of transactions, in order to cover the real character of the transaction (see figure below).
A guidance note published by NFRA also, requires identification of indirect transactions, including through ‘connected parties’. In order to ensure no such indirect transactions have occurred, the management is expected to establish procedures to identify such transactions, and to obtain periodic confirmations from the directors, promoter group, large shareholders and other related parties that there are no transactions that have been undertaken indirectly with the listed company or its subsidiaries or its related parties.
Role of board
The role of the board towards avoiding conflicts of interests is deep-rooted under the corporate laws and securities laws, under various applicable provisions. For instance, the directors have a responsibility towards safeguarding the assets of the company and for preventing and detecting fraud and other irregularities [Section 134(5)(c) of CA 2013]. Section 166 of CA 2013 specifies the duties of directors. These include, among others, the duty to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company [Section 166(2)].
The key functions of the board, as contemplated under Reg 4 of LODR, also includes monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions.
Scope of Exemption under Applicable Laws
As stated above, Reg 23(5) of SEBI LODR exempts RPTs entered into between a holding company and its WoS from the approval requirements of both the AC and the shareholders.
Apart from Reg 23 of LODR, the RPT provisions are contained under Section 177 and 188 of CA 2013. Under section 177(4)(iv) of CA 2013, all RPTs require approval of the AC. The fourth proviso to the said sub-section exempts RPTs entered into with WoS from AC approval requirements. However, the said exemption is not absolute. The proviso reads as follows:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.
Thus, the exemption for RPTs with WoS does not apply in case of a transaction referred u/s 188 of CA 2013. In other words, where an RPT with WoS triggers approval requirements u/s 188, the same will also be required to be approved by the AC u/s 177 first.
Meaning of “a transaction referred to in section 188”
Section 188(1) of CA 2013 provides a list of 7 types of transactions. The list is wide enough to cover almost all types of transactions, except financial assistance in the form of loans etc. However, section 188 becomes applicable, only, in cases where any one or more of the two most crucial elements of a transaction are missing – (i) ordinary course of business and (ii) arm’s length terms. In cases where a transaction does not meet the ordinary course of business or the arm’s length criteria, the same is referred to the board of directors u/s 188 of CA 2013, and requires prior approval of the board.
The fifth proviso to section 188(1) also contains an exemption for RPTs between the holding company and its WoS. Note that the said exemption is applicable only with respect to the approval of the shareholders, the approval of board is still required for RPTs that lack one of the two elements stated above, even though with WoS.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:
XXX
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval:
The conditional exemption given u/s 177 and the absence of any exemption from board’s approval u/s 188 clearly confirms the requirement of ensuring arm’s length terms in transactions with WoS.
Expectations from AC
The AC is the primary decision-making authority in respect of matters relating to related party transactions. NFRA, the audit regulator of the country, has published the Audit Committee – Auditor Interactions Series 3 dealing with audit of Related Parties. The guidance sets out potential points on which the AC may interact with the auditors in the context of RPTs. Where a company avails exemptions w.r.t. AC and shareholders’ approval, the guidance note requires documentation of the rationale for not obtaining Audit Committee’s and Shareholders’ approvals.
Thus, the AC is expected to be the scrutinising authority in ensuring that the terms on which a transaction is proposed to be entered into with a WoS are at an arm’s length, which, in turn, would require bringing the transaction before the AC, if not for approval, then for a pre-transaction scrutiny and information.
Disclosures in financial statements
Ind AS 24 pertaining to Related Party Disclosures require disclosures to be made in the financial statements that the RPTs were made on terms equivalent to those that prevail in arm’s length transactions. However, such disclosure can be made only if such terms can be substantiated. Note that the Ind AS 24 does not contain any exemption for WoS. In the absence of a strict scrutiny of RPTs with WoS for satisfaction of arm’s length basis of the terms of the transaction, such an assertive statement in the financial statements for arm’s length of the terms is not possible.
Dealings with WoS: the suggested approach
In view of the expectations from the AC, board and the auditors, and the potential risks of abusive RPTs using WoS as an intermediary, the following approach may be undertaken before entering into a transaction with WoS:
- A pre-transaction scrutiny may be conducted by the AC for RPTs to be entered into between the holding company and its WoS. This should include all the necessary details as may be required by the AC, such as, nature of transaction, terms of the transaction, total expected value of the transaction etc.
- Based on such scrutiny, the AC may give its comments or recommendations where the same has any concerns. Necessary modifications may be carried out to address the comments of the AC, in order to make the transaction commercially viable for the holding company.
- Where the proposed transaction is not in (a) ordinary course of business or (b) not at an arm’s length basis, the same will require approval of the AC. The AC will refer the transactions to the board for approval u/s 188.
- Every RPT entered into between the holding company and its WoS should, as a part of the quarterly review, be reported back to the AC. Any alteration in terms or value of the transactions should be brought to the notice of the AC.
- As required under Reg 23(9) of the LODR, the transactions with WoS to be reported to the SEs on a half-yearly basis.
Read more:
Related Party Transactions- Resource Centre
Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime
FAQs on Standards for minimum information to be disclosed for RPT approval
Webinar – A Can of “Cannots”: Redefining Secretarial Audits
Participation is free, register at – https://forms.gle/UZWAqtee3dUjtasn8
Read our resources:
FAQs on appointment of secretarial auditors for listed entities
FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations,2024
NAME THEM ALL: SEBI reiterates mandatory disclosure of all promoter group entities in shareholding pattern, regardless of shareholding
Lavanya Tandon, Senior Executive | corplaw@vinodkothari.com
Through the updated SEBI FAQs on LODR Regulations rolled out on April 23, 2025, SEBI has yet again clarified that listed entities are required to disclose the names of all entities forming part of promoter / promoter group (P/PG), irrespective of any shareholding in the listed entity in the quarterly reporting of shareholding pattern to the stock exchanges. (FAQ no. 19 of section II)
Regulation 31(4) of LODR (inserted via SEBI (LODR) (Sixth Amendment) Regulations, 2018) clearly mandates all entities falling under promoter and promoter group to be disclosed separately in the shareholding pattern. However, inspite of this clear mandate, as a matter of practice, India Inc seemingly has decided to disclose names of only such PGs who have shareholding in the company. With this reiteration of regulators expectation in its FAQ, this is the sign for the listed entities to buckle up and collate the entire list of PGs, irrespective of shareholding, for disclosure in the shareholding pattern (next disclosure due in June, 2025)
It should be noted that a complete list of P/PG complements the listing of related parties as one of the elements of the definition of related party is “any person or entity forming a part of the promoter or promoter group of the listed entity”.
SEBI’s persistence requiring disclosure of complete list of PG
Since the longest time now (first through reg 31A and then through reg 31(4) among others), SEBI has been stressing in every way the requirement of disclosing the complete list of PG, irrespective of their shareholding. Below are the instances where SEBI has identified the practice / clarified its position, over and over again.
- Consultative Paper on re-classification of P/PG entities and disclosure of promoter group entities in the shareholding pattern dated Nov 23, 2020
While Reg 31 of SEBI (LODR) Regulations, 2015 mandates that all entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern, there have been cases where listed companies have not been disclosing names of persons in promoter(s)/ promoter group who hold ‘Nil’ shareholding. There is therefore a need for further clarification in this regard to the listed companies
- NSE FAQs on Disclosure of holding of specified securities and Holding of specified securities in dematerialized form dated Dec 14, 2022
Q6. Can the name of the promoter be removed from the Shareholding Pattern during the Quarter in case the Shares are transferred/sold?
The name of the promoter can be removed only after seeking approval of Reclassification from the Exchange. Meanwhile Companies are requested to show the promoters/promoter group with nil shareholding till the approval for Reclassification is granted from Exchange.
- SEBI Circular on disclosure of holding of specified securities in dematerialized form dated March 20, 2025
Table II of the shareholding pattern has been amended as under: i. A footnote has been added to the table II that provides the details of promoter and promoter group with shareholding “NIL”
Getting re-classified to stop disclosure – the only way
In the matter of Jagjanani Textiles Limited, upon transferring the entire shareholding, the name of a PG entity was not disclosed in the P/PG category; rather disclosed in the public category. SEBI observed this as a violation of Reg 31(4). [See para 12 of the Order]
“12. It is observed that the promoter group entities of Noticee 1 i.e. Noticee 5 and 3 had acquired 2,94,000 shares and 5,51,424 shares during the quarter ended March 2013 and March 2014 respectively and since then both the Noticee 5 and 3 had been the shareholders of the Noticee 1 till the date of filing of DLoF i.e. April 10, 2023 except during the quarter ended September 2014 to June 2015 w.r.t the Noticee 5 where she ceased to be the shareholder. In this regard, it is observed that in terms of Regulation 31(4) of LODR Regulations, all entities falling under promoter and promoter group are required to be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entities are listed, in accordance with the formats specified by the Board. It is therefore alleged that both the Noticee 5 and 3 had been wrongly disclosed as Public shareholder during the aforesaid period. Further, it is observed that the Noticee 1 had confirmed to rectify the error in the shareholding pattern filed for the quarter ended June 30, 2023”
Where an entity not holding any shares in the listed entity wants to stop disclosing its name in the shareholding pattern – the only way is to apply for reclassification u/r 31A and get such approval from the stock exchange. Until such approval is obtained, one needs to disclose its name in the P/PG category.
Our related resources on the topic
- SEBI clarifies on critical matters arising from LODR 3rd Amendments & Master Circular
- SEBI revisits the concept of Promoter and Promoter Group
- Making one’s way out – Promoter & Promoter Group
- Classification out of promoter category under Listing Regulations
SEBI clarifies on critical matters arising from LODR 3rd Amendments and Master Circular
Team Corplaw | corplaw@vinodkothari.com
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