Can companies avail GST benefits on CSR spending?

– By Harsh Juneja | Executive (


Section 135(5) of the Companies Act, 2013 (‘the Act’) requires every eligible company (as per section 135(1)) to spend at least 2% of the average of net profits of immediately preceding 3 financial years towards Corporate Social Responsibilities(‘CSR’) activities. The CSR spending may sometimes include contributions made to NGOs or other beneficiaries, or money paid to implementing agencies. However, quite often, the expense may relate to procurement of goods or services which are applied to one or more CSR activities. This procurement of goods or services comes with the tax cost, viz., GST. So the question is, does this GST paid, while acquiring goods or services, give rise to an input tax credit, such that the same may be claimed as a set off? A related, and more important question is, whether CSR expense for the purpose of sec. 135 (5) be the amount net of the ITC, if the ITC is claimable, or the gross amount paid?

Input Tax Credit


Section 16(1) of the Central Goods and Service Tax (‘CGST Act, 2017’) prescribes the eligibility criteria for taking Input Tax Credit. It states that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Hon’ble CESTAT Mumbai, in the case of M/s Essel Propack Ltd. vs Commissioner of CGST, Bhiwandi, gave a view that the CSR gives a company an economically, socially and environment sustainability in the society in the long run, as a company can not operate without providing benefits to its stakeholders. Therefore, it held that if companies are unable to claim input services in respect of activities relating to business, production and sustainability of the companies themselves would be at stake.

Hon’ble High Court of Karnataka, in its judgement, in the case of M/s Commissioner of Central Excise, Bangalore vs. Millipore India (P) Ltd., also was of view that CSR Expenses are mandatorily incurred by employers towards benefit of the society and “to maintain their factory premises in an eco-friendly manner”. Therefore, the tax paid on such services shall form part of the costs of the final products and thus, the company can claim these taxes paid as input services.

Uttar Pradesh Authority for Advance Ruling (‘AAR’) in the matter of M/s Dwarikesh Sugar Industries Ltd held that a company is mandatorily required to undertake CSR activities and thus, forms a core part of its business process. Hence, the CSR activities are to be treated as incurred in “the course of business”.

Section 135(7) is a penal provision under the Act which deals with penalty on non-compliance of section 135(5)  and (6). It was observed by the AAR that a Company fulfilling eligibility criteria under section 135(1) of the Act is required to mandatorily spend towards CSR and thus, must comply with these provisions to ensure smooth run of business.

Thus, Uttar Pradesh AAR held that the expenses incurred by the Company in order to comply with requirements of CSR under the Act qualify as being incurred in the course of business and are eligible for ITC in terms of the Section 16 of the CGST Act, 2017.

Contrary ruling: Free Supply of Goods

Section 17(5)(h) of the CGST Act excludes “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samplesfor the purpose of availing ITC on payment of GST. The term ‘gift’ is not defined anywhere in the CGST Act. However, in layman’s language, gift means a thing given willingly to someone without payment.

In the matter of M/s. Polycab Wires Private Limited, Kerala AAR held that distribution of necessaries to calamity affected people under CSR expenses shall be treated as is if they are given on free basis and without collecting any money. Hence, for these transactions, it was held that ITC shall not be available as per section 17(5)(h).

However, a contrast has been drawn in the Uttar Pradesh AAR Ruling towards goods given as ‘gift’ and given as a part of CSR activities. Gifts are voluntary and occasional in nature whereas CSR expenses are obligatory and regular in nature. AAR held that since CSR expenses are not incurred voluntarily and have to be incurred regularly, they are not to be treated as ‘gift’ and thus, should not be restricted under section 17(5)(h) for claiming ITC.

Availing Benefit through Beneficiary

A company contributes a sum towards a beneficial organisation such as NGOs, Charitable Trusts and Section 8 Companies (‘implementing agencies’) towards fulfillment of CSR activities. However, these implementing agencies also need to hire services of vendors to complete these activities. These vendors charge GST on the services rendered by them. Since these implementing agencies often do not generate any output, the question raises can these organizations also claim ITC on the services rendered by them?

There is a concept of ‘pure agent’ in GST. Explanation to Rule 33 of CGST Rules, 2017 prescribes that a pure agent means a person who –

The implementing agencies fulfill this eligibility criteria of being a ‘pure agent’. Rule 33 also contains some conditions on the fulfilment of which, expenses incurred by the supplier as a pure agent of the recipient of the supplier of goods or services, are excluded from the value of supply-

In our case, if an implementing agency avails any goods or services from a vendor to fulfil the CSR activities for a company, then the payment of any such amount to the vendor shall be treated as a supply made as a pure agent by the implementing agency on behalf of recipient of supply, i.e., the company. Thus, these expenses incurred by the implementing agencies shall be excluded from the value of supply and therefore, are not liable for payment of GST.

CSR Contribution: Pre-GST or Post-GST?

The Act does not clarify that the amount to be contributed towards CSR activities should be inclusive or exclusive of taxes. However, it seems that since GST is charged on supply of goods and services, irrespective of the intention of social benefit, the amount contributed towards CSR can be both inclusive and exclusive of GST. Having said that, the question still pertains on the inclusivity of the amount of GST paid towards the amount of CSR expenditure for the purpose of section 135(5) of the Companies Act, 2013.


While it seems that rationally, expenses incurred on GST for fulfillment of CSR activities should be eligible for claiming ITC, however, there is still some ambiguity in terms of legal provisions. There is one view of Kerala AAR which restricts CSR contribution under section 17(5)(h) while the Uttar Pradesh AAR had a complete inverse view. A clarification from the relevant authorities is sought in this regard so that this perplexity created by different rulings may be solved. When all is said and done, a question still pertains on the amount of the expenditure which is to be considered for the purpose of calculation of CSR expenditure.



Presentation on Corporate Governance for Debt Listed Entities

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FAQs on Corporate Governance norms for Debt Listed Entities

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Corporate law and company articles: resolving complementarity, conflict and congruence



Articles of a company are the rulebook for the indoor management of a company and should be observed at all times subject to the provisions of the Companies Act, 2013 (“the Act”) which has an overriding effect on the articles of a company. Any inconsistency in the articles of a company to that of the Act is ultra vires and gives the Act an upper hand. However, when an apparent inconsistency arises on account of a stricter provision in the articles, can articles be disregarded on grounds of repugnancy? Or whether there can be legal enforceability of articles that are complementing the main provisions of the Act without defeating the intent of law? The question assumes importance in light of certain practical situations which cropped up recently.

Read more

Debt listed entities under new requirement of quarterly financial results

-Implications and actionables

Anushka Vohra | Deputy Manager

The SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021[1] have increased the compliance burden on the debt listed entities. Ranging from introducing the corporate governance requirements on High Value Debt Listed Entities (HVDLEs)[2] to increasing the disclosure and compliance requirements on all debt listed entities, the amendment per se aims to make the current regulatory requirements stringent on the debt listed entities.

One significant amendment under Chapter V, which is applicable on all debt listed entities, is the requirement of submission of financial results on a quarterly basis instead of a half yearly basis, as was previously the requirement. With this write-up, we will try to understand the implications on the debt listed entities due to change in the periodicity of submission of financial results and the required actionables.

As per the amendment, the debt listed entities will be required to prepare the quarterly and annual financial results, as per the format specified by the Board. Having said that the said amendment is effective immediately, the format is not yet in place. Accordingly, the extent of actionables required for preparation of quarterly results (like whether results for the 1st quarter and corresponding second quarter, etc needs to be prepared from now and onwards) may not be clear as on date. 

Entities with listed non-convertible securities

Consideration of financial results

Non-convertible securities include debentures which are not convertible into equity at any given time and constitute a debt obligation on the part of the issuer. Chapter V of the SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) is applicable to entities that have listed their non-convertible securities on the stock exchange(s). Regulation 52 of the Listing Regulations deals with the preparation and submission of financial results

The extant Regulation provided that such listed entity shall submit financial results on a half yearly basis, within 45 days from the end of half year i.e; within 45 days from the end of September & March [for entities following FY April-March]. For the first half year the requirement was mandatory but SEBI provided a relaxation for second half year, whereby it was stated that such listed entity may not be required to submit unaudited financial results for the second half year, if it intimates in advance to the stock exchange(s), that it shall submit its annual audited financial results within 60 days from the end of financial year. Akin to such relaxation, SEBI provided that if such a listed entity submits the unaudited financial results within 45 days from the end of the second half year, the annual financial results may be submitted as and when approved by the board of directors.

Extant framework

Unaudited accompanied with limited review report Audited financial results + statements + Auditor’s Report (AR)
For the first half year (have to be mandatorily given) For the second half year (whether submitted / not)
Yes No Within 60 days from end of financial year
Yes Yes As soon as approved by the board


Now, since the periodicity has changed from half yearly to quarterly, such listed entities will be required to submit financial results within 45 days from the end of each quarter, other than the last quarter and the annual financial results within 60 days from the end of the financial year.

New framework

Unaudited accompanied with limited review report Audited financial results + statements + AR
For the first quarter* For the second quarter* For the third quarter* For the fourth quarter**
Yes Yes Yes No Within 60 days from end of financial year

*mandatorily required

**not required


Landscape of intimations & disclosures – understanding the actionables

It is an irrefutable fact that debt in India is mostly privately placed which primarily involves the Qualified Institutional Buyers (QIBs) and no prejudice is caused to the public at large. Keeping that in mind, the debt listed entities were treated differently from the equity listed entities and were not subject to the such stricter compliances when compared to debt listed entities.

In view of  SEBI’s approach during recent times, , it has put an end to the easy going voyage of a debt listed entity and they have been placed at par with the equity listed entities.

Regulation 50 dealing with intimation to stock exchange(s) has been amended and now require the debt listed entities to intimate to the stock exchange(s) at least 2 working days in advance, excluding the date of board meeting and date of intimation, of the board meeting where the financial results shall be considered (quarterly / annually). This Regulation 50 corresponds to Regulation 29 which is applicable to equity listed entities.

Further, in case of equity listed entities, Regulation 30 (read with Schedule III Part A) is a cumbersome Regulation as the same requires certain events to be disclosed as and when they occur. For debt listed entities, the corresponding Regulation is Regulation 51 (read with Schedule III Part B). Unlike Regulation 30, the list under Regulation 51 (i.e; under schedule III) was narrow in its scope, however, with the said amendment, the list under the Part B of Schedule III, applicable on debt listed entities has also been amended to streamline the same with what is applicable on equity listed entities.

Furthermore, while submitting the financial results (quarterly / annually) under Regulation 52, the debt listed entities have to provide certain information. Such information is captured under Regulation 52(4) and includes the following:

Exemption : Non Banking Financial Companies (NBFCs) which are registered with the RBI were exempted from making disclosure of interest service coverage ratio, debt service coverage ratio and asset cover. However, exemption from disclosure of asset cover has been withdrawn i.e; now the NBFCs that have listed their debt securities have to make disclosure of asset cover. Also, the exemption from disclosing interest service coverage ratio and debt service coverage ratio is now also extended to Housing Finance Companies (HFCs) registered with the RBI.

This new framework is now in sync with what is applicable to equity listed entities. The Regulator’s intent to subsume the compliances applicable on equity and debt listed entities seems to have been inspired by the need for more transparency and promptness of information. However, this sudden drift calls for certain actionables on the part of debt listed entities.

A summary of actionables can be represented as under:


Other aspects :

Entities with listed equity shares / convertible securities

The entities that have listed their equity shares / convertible securities i.e; specified securities are covered under Chapter IV of the Listing Regulations, subject to exemptions under Regulation15. These entities have to comply with Regulation 33 for preparation and submission of financial results and the timeline for the same is quarterly. There has been no change for such listed entities as far as the financial results are concerned.

However, since the amendment has made Chapter IV applicable on HVDLEs which are debt listed entities covered under Chapter V, these HVDLEs have to comply with both Regulation 33 and Regulation 52. But since the requirements in both these regulations have been streamlined, no impact will be caused on such HVDLEs.

Entities with listed equity shares & non-convertible securities OR listed convertible securities & non-convertible securities

Such entities are governed by both Chapter IV and Chapter V, thus w.r.t. financial results they have to comply with both Regulation 33 and Regulation 52. Prior to such amendment, such listed entities followed the quarterly preparation and submission of financial results, since the same is stricter. For all other provisions which are common among both chapters but vary in timelines, the one with the stricter provision needs to be followed. For instance, in case of prior intimation of board meetings where financial results shall be considered, Chapter IV provides advance intimation of 5 days, whereas Chapter V provides advance intimation of 2 working days. Clearly, the timeline of 5 days in advance is stricter, therefore such entities shall comply with the same.

Concluding remarks

The sense of ease on the debt listed entities has been undone and the Regulator is preparing to bring the equity and debt listed entities under the same blanket. The extension of Chapter IV on HVDLEs seems to be a wake up call for debt listed entities which are not HVDLEs as of now. The enhanced disclosure on all debt listed entities would nevertheless burden them, however the impact of the same is yet to be analysed.

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[2] A listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs. 500 crore & above as on March 31, 2021.

‘High value’ debt listed entities under full scale corporate governance requirements

SEBI move nullifies MCA exemption; bond issuers face disproportional compliances

Vinod Kothari & Vinita Nair  | Vinod Kothari & Company

Giving bond markets in the country a push is an admitted policy objective; so much so that “large borrowers” are mandated to move a part of their incremental funding compulsorily to the bond markets. Just when privately placed bond issuance was looking very promising, augured by low interest rates and  increasing investors’ confidence, SEBI’s recent move of notifying SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021 (‘2021 Amendment’)to extend corporate governance requirements, largely equivalent to that applicable to equity listed entities, comes as an enigma. These new norms, incorporated in the post-listing corporate governance requirements imbibed in SEBI ( Listing Obligations and Disclosure Requirements) Regulations, 2015  (‘Listing Regulations’) become effective immediately on a “comply or explain” basis, and become binding from 1st April, 2023.

What is surprising is that the capital market regulator has thought of equating a debt listed entity with an equity listed one; potentially disregarding the essential difference between equity listing and bond listing. Equity listing is achieved by a public offer, which underlies widely dispersed retail investors’ interest. Bond listing, to the extent of 98%, is by way of private placement, which definitely means that bonds are placed with knowledgeable qualified institutional buyers. Also, it is a known fact that a large number of listed bond issuers are private limited companies, which are close corporations, with strictly private holding of capital. In light of these facts, extension of substantially the same regime for debt listed entities as that applicable to equity listing creates several irreconcilable compliance requirements, some of which are detailed out in this article. At a time when the need to push the country’s bond markets to new heights, ahead of a potential inclusion of India in global bond indices, is unquestionable, this regulatory move is both surprising as prejudicial. Surprising, because many of SEBI’s regulatory exercises, there was no public comments for these amendments.

The key to the potential prejudice that the regulatory move may cause to bond markets is the definition of “high value debt listed entities”, picking up a threshold of Rs. 500 crores. If the total value of listed bonds outstanding, purely from the corporate sector, is over Rs. 36 lakh crores[1], the amount of Rs. 500 crores is infinitesimal, less than 0.014% of the bond market, and therefore, the basis for taking this value as “high value” is seriously flawed.

Let us start with some facts. India’s bond market is largely a private placement, comprised of bespoke bond issues with limited number investors, majority of them being Qualified Institutional Buyers (QIBs). While technically, these bonds may be sourced through an electronic platform, the avowed fact is that bond issues by even the most frequent bond issuers are negotiated over the counter. Public issue of bonds is activity rarity. This is evident from Table 1: Listed debt issuance, by way of private placement vis-à-vis public issuance during last 3 years.

Regulatory regime before:

Regulation is always proportional to the regulatory concern: the regulatory concern in this case, obviously, is investor protection. Securities regulator is neither the prudential regulator for the bond issuers, nor does it lay the operational safeguards in working of companies. The key objective of the securities regulator is to ensure that the corporate governance does not entail risks to investors’ interest.

Further, the regulatory regime that existed hitherto is as follows: Once the debt securities are listed, companies were required to comply with Listing Regulations mainly Chapter II (dealing with principles relating to disclosures), Chapter III (dealing with common obligations for all listed entities and Chapter V (dealing with disclosure requirements on website, to debenture trustees, stock exchanges, submission of financial results and structure and terms of debt securities). Provisions relating to corporate governance were not applicable to debt listed entities.

It is also notable that debt listed entities were earlier only required to prepare half yearly financial statements, as opposed to quarterly financial statements applicable to equity listed entities.

The rest of the labyrinth of corporate governance provisions, dealing with composition of board of directors, non-executive chairperson, independent directors, constitution of the several board committees, shareholders’ approval for  related party transactions, etc. were not applicable to debt listed entities.

Present amendment

SEBI, in its Board meeting held on August 06, 2021 approved amendments to the Listing Regulations and notified 2021 Amendment with effect from September 8, 2021[2]. The amendments may be classed into (i) those applicable to a “high value” debt listed entity and (ii) those applicable to every entity having its non-convertible securities listed[3].

The 2021 Amendment has made corporate governance related provisions applicable to a listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs. 500 crore and above as on March 31, 2021 (‘HVD entity’). Further, once the provisions become applicable, it will continue to apply even if subsequently the outstanding value falls below the threshold.

Given the details of bonds issuance and present outstanding indicated above, there would be several entities that would be regarded as an HVD entity. In view of SEBI’s requirements under Large Corporate Borrower framework, entities with any of its securities listed, having an  outstanding  long  term  borrowing  of  Rs.  100  crores  or  above and with credit rating of ‘AA and above’[4], will have to mandatorily raise 25% of its incremental borrowing by ways of issuance of debt securities or pay monetary penalty/fine of 0.2% of the shortfall in the borrowed amount at the end of second year of applicability[5].

If one were to argue it is the mere size of debt funding that brings in corporate governance requirements, then even a company that borrows from banks and financial institutions to the extent of Rs. 500 crores should, a priori, have been subjected to similar requirements. If moving from loans to bonds attracts severe corporate governance requirements, not applicable otherwise, there is a clear disincentive to moving bond markets, which is conflicting directly with SEBI’s own requirement of a “large borrower framework”.

We discuss some of the new requirements imposed on HVD entities, and demonstrate how some of these are completely non-reconciling with the type of entities to which they would apply.

Complete overhaul of Board composition

The Board of an HVD entity should comprise of prescribed number of independent directors (‘IDs’) depending on the nature of office of the Chairperson. Appointment of IDs in case of private companies and wholly owned public limited companies will require inducting requisite number of external persons on its Board. In case of a promoter Chairperson, half of its Board should comprise of IDs. A private company is a private matter, in terms of its shareholding. It cannot have an “independent” shareholder. Hence, boards of private companies, as per law, may only have 2 directors. SEBI, on the contrary, mandates 6 directors. Regrettably, the very “privacy” of a private company is compromised with the mandated presence of independent directors. Indeed, there are external investors who contributed to the debt of the entity, but they did with the explicit understanding that the corporate governance of a private company is remarkably different from that of a widely held company. If a private company has to behave and be governed almost like a widely held public company, then there may be a very strong disincentive for such companies to access bond markets.

The requirement of IDs is not merely getting some guests into the boardroom: IDs are required to be independent of management, should meet the eligibility criteria and are responsible to protect the interest of the minority shareholders. In case of several HVD entities there would be no minority shareholders whatsoever: therefore, the IDs would be left wondering as to how the IDs discharge the very same obligations as applicable to an entity with a few lakh shareholders.

The procedure to be followed by a listed entity for appointment of an ID under Listing Regulations is also very elaborate. The Nomination and Remuneration Committee (‘NRC’) is required to prepare a description of the needed capabilities and skill sets after doing a gap analysis, identify candidates basis the prepare description, justify to the Board and shareholders how the proposed incumbent meets the criteria and then recommend their appointment.

The listed entities are not only required to obtain declaration of independence from the IDs but also assess the veracity of the same. Further, the provisions stipulate conducting familiarization programme periodically, obtain Directors and Officer’s insurance for the IDs (otherwise applicable only to top 500 equity listed entities w.e.f. Jan 1, 2022), and ensure that a separate meeting of IDs are carried out.

Need to constitute 4 Committees

The HVD entity, irrespective whether a private company or a closely held company, is required to have an Audit Committee, NRC, Risk Management Committee (otherwise applicable only to top 1000 listed entities based on market capitalization,  but strangely applicable to the entire population of HVD entites) and even a Stakeholder’s Relationship Committee (‘SRC’).

Section 178 of CA, 2013 also mandates constituting SRC only where there are 1000 shareholders, debenture holders, deposit-holders and any other security holders at any time during a financial year. And there are quite a few debt listed entities that have not triggered this requirement even after 8 years of enforcement of CA, 2013.

Under Listing Regulations as well, the role of SRC is mainly to resolve investor grievances, oversee steps taken by the listed entity to reduce quantum of unclaimed dividend, effective exercise of voting rights, monitoring adherence to service standards by RTA, which may not be even relevant to HVD entities that are private companies or closely held public companies. Strangely, the requirement of having SRC will be applicable to debt listed entities having a handful of debt investors, and purely in-house shareholders.

Remuneration related approvals

Requirement to seek shareholder’s approval by way of special resolution is applicable in case of continuing with directorship of a non-executive director (‘NED’) of 75 years and above, or remunerating one NED to the extent of more than 50% of annual remuneration of all NEDs in a financial year, or paying of remuneration to the promoter directors serving in executive capacity in case (i) the annual remuneration payable to such executive director exceeds Rs. 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or (ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity.

And it will not be a case of wide shareholder participation with institutional shareholders exercising voting rights basis the guidance from proxy advisors etc. as several of HVD entities could be private companies or closely held public limited companies.

Further, prior approval of public shareholders is required in case any employee including key managerial personnel or director or promoter of a listed entity enters into any agreement for himself /herself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity.

Formulation of codes and policies

Code of conduct for Board and senior management personnel, policy for determination of material subsidiary, policy for determination of materiality of and dealing with related party transactions, archival policy for website are some of the additional codes and policies that HVD entities will have to frame.

Paradoxical regulation: Related Party Transactions (‘RPTs’) to require minority shareholder approvals

While framing a policy for determination of materiality of and dealing with RPTs and half yearly disclosure of RPTs to stock exchange might seem feasible, the 2021 Amendment also stipulates only IDs in the Audit Committee to approve RPTs. Further, in case of material RPTs, at the time of seeking shareholder’s approval all related parties are prohibited from voting to approve the RPT i.e. either they may vote against or abstain from voting altogether.

This is completely paradoxical. A debt listed entity may be a subsidiary of a holding company. The holding company, being a “related party”, will be excluded from voting. If the related parties are to be excluded from voting at the general meeting of a private company, it is quite likely that there will be no shareholders whose votes may be counted!


Subsidiary related governance

An HVD Entity will be required to ascertain material subsidiary, induct an ID on the board of super material subsidiary (that contribute 20% of consolidated income or net worth), place details of significant transactions undertaken by unlisted subsidiary before its Board, place the financials of unlisted subsidiaries before its Audit Committee and seek prior approval of shareholders in case of disposal of shares resulting in losing of control over the entity by the HVD entity or selling/leasing/ disposing 20% of the assets of such material subsidiary in a financial year.

Group governance may be more relevant for entities where the listed entity is answerable for creation of shareholder value. In case of a debt listed entity, the expectation of the investors is not creation of shareholder value but ability to timely service the debt and redeem the principal.


Will this be a deterrent for new issuers or small players from opting for the listed debenture route? Whether these enhanced corporate governance norms provide greater comfort and assurance to the investors in securing timely repayment of their monies? Will it increase trading in debt securities in the secondary market? It is assumed that SEBI must have considered these before enforcing the 2021 Amendment and only time could reveal the effectiveness of these provisions.






[1] The total corporate bond outstanding as on June, 2021[1] is about 36,27,667.18 crores represented by 26,350 outstanding instruments of 3903 issuers. The actual number of issuers, instruments and outstanding amount will be higher, if one were to include unlisted debt issuance as well.


[3] As per SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 means debt securities, non-convertible redeemable preference shares, perpetual non-cumulative preference shares, perpetual debt instruments and any other securities as specified by the Board;

[4] As per para 2.2 of

[5] a listed entity identified as a LC, as on last day of FY “T-1”, shall  have to  fulfil  the  requirement  of  incremental borrowing for FY “T”, over FY”T” and “T+1”.

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Social Stock Exchange


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Presentation on LODR Fifth Amendment Regulations, 2021

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Corporate governance enforced on debt listed entities

  • LODR (Fifth Amendment) Regulations, 2021 notified

Payal Agarwal, Executive (

Brief background

SEBI has, continuing with its trends of the recent months, notified SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021 [hereinafter referred to as the “Amendment Regulations”] on 7th September, 2021 to amend the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [hereinafter referred to as the “Listing Regulations”]. The amendments have huge implications on debt listed companies and provide for various mandatory requirements to be fulfilled by an entity which has listed its debt securities on stock exchanges. While some changes deal with alignment of the requirements with those under the Companies Act, 2013 [“Act”], some are significantly different calling for actionable on the part of debt listed companies.


Particulars Applicable entities Applicable dates
Chapter IV – Regulations 16 to 27

(“Corporate Governance Provisions”)

Entities which has listed its non-convertible securities (“NCS“) on a recognised stock exchange and has outstanding listed debt securities of Rs. 500 crores or more [hereinafter referred to as “high value debt listed entities” or “HVDs”]


Presently, limit has to be checked as on 31st March, 2021

Applicable w.e.f. 07th September, 2021 on “comply or explain” basis


Mandatory w.e.f. 31st March, 2023


·         Comply or explain shall mean –

a.       Comply with the requirements within 31st March, 2023

b.      In case of non-compliance/partial compliance, explain reasons for same along with steps initiated to ensure compliance

·         to be reported in the quarterly compliance report filed under Reg 27

Applicability attracted during the course of a year to be complied within six months of such applicability
Amendments relating to Chapter V of the Listing Regulations applicable on all entities which have listed its non-convertible securities on recognised stock exchange with effect from 7th September, 2021

Further, it is mentionable that vide amendment in Reg 3(3) of the Listing Regulations, the Corporate Governance Provisions once applicable on a HVD entity, has to be complied with and does not cease to apply subsequently unless the company has no listed debt outstanding.

Corporate governance requirements applicable on HVDs

The debt-listed companies are mostly private companies or public companies that are unlisted for the purposes of the Act, and therefore, the alignment of their board composition with that of other listed entities may call for various actionable and some practical difficulties during the course of implementation. Here, we have tried to present the composition of board and committees as will be required to be ensured by the debt-listed entities and the possible constraints that may follow.

Relevant head Under the Act Under the Listing Regulations
Private company Unlisted public company
Ratio of executive (ED) and non-executive directors (NED) NA NA optimum combination with at least 50% NEDs
No. of independent directors (IDs) NA 2 IDs 1/3rd if Chairperson (CP) is NED

½ if CM is ED

Maximum age of NED NA NA 75 years (if beyond that, a special resolution is required along with justification for such appointment)
Minimum no. of board meetings (BM) with maximum gap between two meetings 4 (with a max gap of 120 days between two subsequent meetings) Same Same
Remuneration/ commission to directors NA As per the limits of net profits u/s 197 of the Act read with Sc. V –

Special resolution of members required if exceeds limits

·         Aggregate remuneration to all – 11%

·         Single ED – 5%

·         All EDs in aggregate – 10%

·         All NEDs in aggregate – 1%/ 3% (if no NEDs)


Approval of members by way of shareholders’ resolution required if –

·         Commission to single NED > 50% of total commission payable to NEDs

·         Annual remuneration to each ED > Rs. 5 crores or 2.5% of net profits – HIGHER

·         Aggregate remuneration to all EDs > 5% of net profits

Performance evaluation of IDs NA criteria of evaluation to be formulated by NRC to be done by entire board
Maximum no. of directorships in 20 companies (out of which max 10 can be public cos.) in 20 companies (out of which max 10 can be public cos.) Not more than 8 directorships in listed entities (excludes debt listed entities)

Not more than 7 directorships in listed entities as ID (excludes debt listed entities)

Composition of Audit Committee (AC) NA  

●      Min 3- directors

●      Majority of IDs

●      Majority of members (inl. chairperson) shall be a person with ability to read and understand financial statements.

●      Min- 3 directors

●      At least 2/3rd of (ID)

●      All members to be financially literate and at least 1 member shall have accounting or related financial management expertise.)

●      Chairman – shall be ID

●      CS – Secretary of Committee.

Meetings and quorum of AC Not Specified. ●      At Least 4 times in a year and  (with a max gap of 120 days between two subsequent meetings)

●      Quorum – 2 or 1/3rd of the members, whichever is greater, with at least 2 IDs.


Composition of Nomination and Remuneration Committee (NRC) NA ●      Min- 3 NEDs

●      At least not less than half directors shall be ID.

●      Chairperson of the entity, Executive or not, may be member of committee but not the CM of Committee

similar requirements except that CM must be an ID
Meetings and quorum of NRC Not Specified. ●      Quorum – 2 members or 1/3rd of the members, whichever is greater, with at least 1 ID.

●       At least one meeting in a year.


Composition of Stakeholders Relationship Committee (SRC) Applicability- Company which consists of >1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a FY.

●      CP- shall be a NED.

●      Members as decided by board.

●      CP- shall be a NED.

●      Min- 3 directors, with at least 1 being ID.


Meetings of SRC Not Specified. ●      Committee shall at least meet once a year.
Composition of Risk Management Committee (RMC) NA NA  

●      Min- 3 directors, with majority of them being members of BOD, including at least 1 ID

●      Chairperson- Member of BOD and Sr. executives may be members.


Meetings and quorum of RMC ●      Quorum – 2 members or 1/3rd of the members, whichever is higher, incl.  at least one member of BOD in attendance.

●      Committee shall meet at least twice in a year(w.e.f 5.5.2021)

Related Party Transactions (RPT) In case of private company –  second proviso to Sub-section (1) of Section 188  shall not apply. ●      Approval required only for specified transactions under Sec 188

●      All members of AC can vote

●      All RPTs shall require prior approval of the AC.

●      Only those members who are IDs shall approve RPT

Secretarial Audit Applicability- O/S loans or borrowings from banks or public financial institutions of 100 crore or more. Applicability-

PUSC- 50 cr or more, or

Turnover- 250 cr or more

O/S loans or borrowings from banks or public financial institutions of 100 crore or more.


Note- Material Unlisted company of a listed entity is also covered.

Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial  audit.


Every listed entity shall submit a secretarial compliance report within 60 days of the end of FY.

Analysis of the amendments

As demonstrated in the table above, the compliances that will be made applicable to an HVD entity are much more diverse than that applicable to a private company/ unlisted public company. However, these debt listed entities are mostly non-banking financial companies (NBFCs), on which the corporate governance directions of RBI are applicable. Considering the same, the amendments may not result in wide impact and changes in the existing board and committee structure. Only minor modifications may be required to align the composition in such a way that it meets the criteria of both RBI (under Corporate Governance Directions) and SEBI (under Listing Regulations).

Maximum number of committees’ memberships – an anomaly in the language of law?

Reg 26 of the Listing Regulations specifies the maximum no. of committees in which a director can hold membership/chairmanship. It provides that a director cannot be a member in more than 10 committees and Chairman in more than 5 committees at any one time. In regard with the same, certain classes of companies are specifically included/ excluded as below –

Here, while the public companies are specifically included in one hand, HVDs have been excluded which can be public as well as private companies. Therefore, there arises an anomaly as to whether public companies, being HVDs, are exempted while calculating the number of committees, or whether the same has to be included?

A possible interpretation that may follow is that a company, only on account of being a HVD, will not get included for the purpose of counting committee memberships under this Regulations. However, a public company, being specifically included irrespective of being listed or not, committee memberships of such public companies should also be taken into account which are listed as HVD entities.

Board-level compliances


Increased compliance burden on debt listed entities

Besides the corporate governance provisions that have newly become applicable on the HVD entities, the regular compliances of the debt listed entities have also undergone vivid changes mostly in line with the requirements applicable to a listed entity having its equity shares listed in stock exchange. The compliance requirements are two fold – (i) increasing the disclosures required to be made to the stock exchanges and (ii) increasing the frequency of such reporting/ disclosures (shifting half yearly compliances into quarterly etc). The Amendment Regulations also provide clarity with regard to the time within which disclosures are required to be made. General terms have been replaced with more specific matters and timelines.

Quarterly compliances

Requirement with respect to financial results*

In the erstwhile Reg 52, the debt listed entities had an option to submit unaudited financial results followed by annual audited financial results once approved by the Board. However, vide the Amendment Regulations, it has been mandatory for the debt listed entities to submit audited financial results within 60 days from the end of the financial year. Some additional accounting ratios have also been specified to be disclosed by the companies. Further, the asset cover is also required to be disclosed along with the results.

A clarificatory change is with regard to the exemption of providing information related to debt service coverage ratio and interest service coverage ratio by Housing Finance Company (HFC) along with NBFC.

Half-yearly compliances

Website disclosures

Any change in the information has to be updated within two days. The stock exchange intimations are required to be kept in the website for a period of 5 years and archived thereafter.

Stock exchange intimations

Matters concerning the debenture holders are also required to be intimated to the debenture trustee simultaneously with intimation to the stock exchanges.

Material modifications in structure of NCS

Reg 59 deals with the approvals required for any material modifications to be made in the structure of NCS. The three step process requires –

  1. Approval of board and debenture- trustee
  2. Approval of debenture-holders
  3. Approval of stock exchanges

In the erstwhile Regulations, the consent of a requisite majority of securities holders was required to be taken before applying to the stock exchange for its approval. However, in the Amendment Regulations, the written consent of atleast 3/4th (by value)of the securities holders is required to be taken, before proceeding with any material modification in the structure of NCS. The company is further required to provide e-voting facilities in respect of the same.

Our comments –  Requirement of consent of 3/4th by value is in line with the requirements for variation of rights under Section 48 of the Act, which applies to variation in rights of shareholders. However, the same may not be practically possible in case of debenture holders, who may not care to vote at all. Moreover, considering that the debenture trustee is already approving the modification, adequate protection to debenture holders are already ensured.  Further, what is material modification is not a defined term and left to the discretion and judgement.

Concluding Remarks

The status of debt listed companies had undergone a change with effect from 1st April, 2021 after an amendment in the definition of listed companies under the Companies Act, 2013, vide which the debt listed companies were no more considered as a ‘listed’ company for the purposes of the Companies Act, 2013. This might have led to loose ends in the corporate governance of such debt listed companies. SEBI’s move of enforcing corporate governance provisions on HVD entities can be seen as a measure to refill the gaps. However, the corporate governance provisions under the Listing Regulations are quite stringent and will make it tougher for the private companies to get their debt securities listed. While there is a minimum outstanding listed debt threshold to determine applicability of such corporate governance provisions, however, the limits are very minimal from the viewpoint of companies and will take a huge chunk of debt listed companies under its ambit.


Our other resources on related topics –



Understanding the unification of SEBI’s share-based employee incentive schemes

– Highlights of the SEBI SBEB and Sweat Equity Regulations

– Corplaw Division,

In order to consolidate SEBI (Share Based Employee Benefits) Regulations, 2014 (‘SBEB Regulations’) and SEBI (Issue of Sweat Equity) Regulations, 2002 (‘Sweat Equity Regulations’), SEBI had issued a discussion paper on July 8, 2021. The changes proposed in this discussion paper as well as incorporation of the previously issued SEBI Circulars in the context of SBEB Regulations have now been imbibed under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (‘New Regulations’) which are effective from August 13, 2021. The same aims at rationalization of the erstwhile provisions in order to make them more vigorous with best global practices and ease of doing business.

In this article, we have discussed the major highlights and actionable rolling out of the said New Regulations.


1. Enabling definition of employees

  1. Following the intent stated in the discussion paper issued in this regard, the New Regulations give a free hand to a company coming up with a share-based employee benefit scheme (SBEB Scheme). That is to say that as per the language used under the New Regulations under regulation 2(1)(i), the company can choose which employees can be included under any SBEB Scheme. Accordingly, from the date of enforcement of the said provisions, permanent as well contractual employees may be considered for the purpose of granting SBEB. Further, this change is applicable in reference to issuance of sweat equity shares as well.
  2. Furthermore, an employee, whether permanent or not, must be exclusively working for the company or its group companies. The word ‘exclusive’ is added by the New Regulations for ensuring that even though a non-permanent employee is also eligible for SBEB but he must be working on an exclusive basis either in India or outside. This exclusive working criteria is only applicable for SBEB and not for issuance of sweat equity.
  3. Also, as a matter of clarificatory change, the New Regulations specifically state that an NED is also included within the ambit of the term ‘employee’ who is not a promoter or a member of the promoter group. It is pertinent to note that the concerned provision was already present in the erstwhile SBEB Regulations [regulation 2(1)(f)(ii)]; however, an explicit provision in this connection has been made for the sake of avoiding any ambiguity or difference of interpretation.
  4. Lastly, the New Regulations have increased the ambit of the term ‘employee’ under regulation 2(1)(iii) in the context of by stipulating that an employee or director of a group company including holding, subsidiary or associate group shall also be eligible to be included under the purview of the term ‘employee’. Under the erstwhile SBEB Regulations [regulation 2(1)(f)(iii), only an employee or director of a holding or subsidiary company was included under the criteria.


The whys and wherefores: The new Regulations have increased the arena of the term ‘employee’ in order to provide flexibility to the companies so that they can cover more employees under the schemes offered for their benefit. Further, the New Regulations have permitted the designated employees of group companies to be qualified for the purpose of SBEB schemes.  


2. Cash-settled SARs fall outside the purview of the New Regulations

Explanation 2 as added under regulation 2(1)(qq) of the New Regulations explicitly state that any reference to stock appreciation right or SAR shall mean equity settled SARs and will not include any scheme which does not, directly or indirectly, involve dealing in or subscribing to or purchasing securities of the company. This gives an indication that any scheme which is settled only in cash and not involves equity will fall  outside the purview of the New Regulations.

As clearly specified under the New Regulations, the provisions shall be applicable in case of an equity settled SARs scheme as well as a scheme wherein the company has not stated upfront whether the same would be settled in cash or equity. However, in case of a scheme which is to be settled in cash only, the same has been seemingly made to fall outside the purview of the New Regulations.

The whys and wherefores: The rationale behind the present change is to make the provision related to SAR in line with the applicability criteria for an employee benefit scheme as covered under both the erstwhile SBEB Regulations and the New Regulations under regulation 1(4)(ii) which states that for application, a scheme should be for direct or indirect benefit of employees and involves dealing in or subscribing to or purchasing securities of the company directly or indirectly, Therefore, it is now cleared that cash settled SAR will not be governed by the New Regulations.

3.Applicability to equity listed companies

Regulation 1(4) of the New Regulations explicitly states that the provisions of the concerned regulations shall apply to any company whose equity shares are listed on a recognised stock exchange in India. The word ‘equity’ is specifically added by the New Regulation while in the erstwhile SBEB Regulations, the reference was made with respect to a company whose shares are listed on a recognised stock exchange [Regulation 1(4)].

The whys and wherefores: This change is put forth only for the purpose of clearing the language of the concerned provision although the intention was clear under the erstwhile SBEB Regulations as well.

4. NRC may act as Compensation Committee

As per the recommendations proposed in the consultation paper of the Expert Group, the New Regulations have enabled the NRC to act as compensation committee for the purpose of these regulations. The reference to Regulation 19 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) has been provided under the New Regulations under regulation 5(2).

The whys and wherefores: The Expert group asserted that a listed company already constitutes NRC as per the mandate and therefore, it could perform all the functions as are endowed on a compensation committee.

5. Switching of route of administration: Trust v/s Direct

Second proviso as added to Regulation 3(1) of the New Regulations stipulates that a company is allowed to change the mode of implementation of the scheme if the following conditions are satisfied:

  • Prevailing circumstances should warrant such change.
  • Fresh approval from shareholders via special resolution is obtained before affecting such change.
  • Such change should not be prejudicial to the interest of the employees.

The whys and wherefores: This can be inferred as one of the most liberating changes introduced by the New Regulations. A company can now flexibly switch the administration of a SBEB scheme i.e. from direct route to trust or vice versa. This move will eliminate the difficulty being faced by the companies in deciding upfront whether a scheme is to be implemented through a trust or otherwise.

In order to avail the benefit of the amendment, the company will be required to state the circumstances warranting the change. As the trust can be used as a good device to fund the acquisition of the company’s own shares at an opportune price, thereby minimising the cost to the company, the same may constitute as a reason warranting the change in route of implementation.

6.Varying terms of scheme due to regulatory changes

A company is allowed to vary the terms of the scheme offered subject to shareholders approval via special resolution and ensuring that the intended variation is not in any way prejudicial to the employees. However, under the erstwhile SBEB Regulations, companies were dubious with respect to the applicability of the shareholder’s approval via special resolution for varying the terms of the scheme for the purpose of meeting any regulatory requirement. This issue was mainly on account of the language used which lacked clarity on the concerned subject. Therefore, in order to bring clarity, the New Regulations have amended the provision with respect to varying the terms of the scheme on account of any regulatory requirement which was earlier made part of the restrictive sub-regulation under the erstwhile SBEB Regulations [Regulation 7(1)]. Hence, any variation in the terms of the scheme on account of any regulatory requirement which is restrictive in nature and without changing which the scheme becomes inoperative can be made without shareholder’s approval.

The why and wherefores: Since regulatory changes, the periodicity of which is unpredictable, are not in the control of a company therefore, any SBEB scheme which warrants variation to be made on account of regulatory changes should be allowed to be undertaken by the company without any pre condition as to obtaining shareholder’s approval.

7. Repricing now only with help of a special resolution

Under the erstwhile provisions [Regulation 7(5)], re-pricing of options/SARs/shares required passing of an ordinary resolution. However, Regulation 7(5) of the New Regulations mandate for a special resolution to be obtained.

Any compliance which is being made pursuant to the amendment should abide by the same, however, acts of the past need not be re-done therefore, any options/SARs/shares which were repriced basis shareholders’ approval via ordinary resolution prior to the advent of the New Regulations, will not be affected with the new compliance requirement.

The whys and wherefores: Repricing decision, especially in the situation when the market is not doing good, can affect the wealth of the shareholders on account of the increased financial burden that a company would have to bear pursuant to heavy discounting in order to make the scheme attractive.

8. Determining total ceiling for secondary acquisition

Explanation 1 to Regulation 3(11) of the New Regulations stipulates that the reduction of share capital by virtue of a buy-back or scheme of arrangement, etc. should also be factored in the calculation of limits of shareholding of trusts under secondary acquisition.

The whys and wherefores: The erstwhile SBEB Regulations [Explanation 1 to regulation 3(11)] prescribed that where there is expansion of capital on account of corporate actions including issue of bonus shares, split or rights issue then such expansion shall be taken into account while reckoning the limits of shareholding of trusts under secondary acquisition. However, the Expert Group was of the view that similar to situations such as bonus issues, where the paid-up share capital (and accordingly the shareholding of the trust) of the company increases proportionately, the reduction of capital may also take place due to corporate actions such as buy-backs. Therefore, taking into account only expansion would not be feasible. When capital is reduced, the shareholding of the trust should also react accordingly and hence the present change is introduced.

9. Transfer of surplus on winding up of scheme

Regulation 8 of the New Regulations stipulates that the surplus money or shares remaining on winding up of the scheme, may be transferred to other existing schemes under the regulations, subject to approval obtained by shareholders on the recommendation of the compensation committee.

The whys and wherefores: The rationale behind the same is that the assets of the trust are acquired and earmarked for the benefit of the employees of the company, therefore, if any surplus remains with the trust upon winding up, an option has been provided for deferring the utilisation of such funds or using it for the benefit of employees through a different scheme under the regulations.

10. Certification by secretarial auditor

Annual Compliance Certificate

Regulation 13 of the New Regulations expressly envisages that board of directors are required to obtain compliance certificate on annual basis from secretarial auditors of the company. The words ‘secretarial auditors’ have been added in order to clear the ambiguity created by the erstwhile SBEB Regulations [regulation 13] where the only word mentioned was ‘auditors’. As a matter of practice, companies used to obtain the certificate from their statutory auditors.

Compliance certificate certifying administration and implementation of General Employee Benefit Scheme (‘GEBS’) as per the prescribed regulation

Further, Regulation 26(2) of the New Regulation dealing with administration and implementation of GEBS stipulates that  “the shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of GEBS”. As per the New Regulations, the threshold should be considered as on the date of balance sheet since the erstwhile approach of reckoning threshold not to exceed “at any point of time” was practically not feasible on account of fluctuating share prices.  Furthermore, a compliance certificate from the secretarial auditor in this regard at the time of adoption of such a balance sheet by the company is also introduced as a mandatory requirement.

Compliance certificate certifying administration and implementation of Retirement Benefit Scheme (‘RBS’) as per the prescribed regulation

Also, Regulation 27(3) of the New Regulation dealing with administration and implementation of RBS stipulates that “the shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of RBS”. Alike GEBS, similar change is introduced by the New Regulations under the RBS provision as well with the same intention challenging the erstwhile approach of reckoning. And again alike GEBS, a compliance certificate from the secretarial auditor to this effect is introduced as a mandatory requirement under RBS as well.

The whys and wherefores: As per the usual practice, it was statutory auditors who were issuing this compliance certificate however, it was perceived by the Expert Group, constituted by SEBI for recommendations with on the New Regulations, that the secretarial auditor was more conversant with these laws compared to other categories of persons, and it is the secretarial auditor that is required under Regulation 24A of the LODR Regulations, to furnish a secretarial audit report on an annual basis therefore, it would be more feasible if the concerned compliance certificate is issued by secretarial auditor and accordingly, the concerned change is introduced. Further, introduction of secretarial auditor certificate certifying compliance w.r.t implementation and administration of GEBS or RBS is to ensure due compliance under the New Regulations.

11.Extension of time period for appropriation of shares

Under regulation 3(12) of the New Regulations, the period of appropriation of shares acquired through secondary market acquisition, not backed by grants, has been extended from the current time period of 1 year to a period of 2 years, subject to the approval of the compensation committee.

The whys and wherefores: The idea behind the present change is to provide flexibility from the rigid time period. However, this may allow companies to use the provision for appropriation to support their own share prices by purchasing the same without any intention to make grants.

12. In-principle approval prior to grant of options

Regulation 12(3) of the New Regulations explicitly stipulates that for listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principle approval of the recognized stock exchanges where it proposes to list the said shares prior to the grant of options or SARs.

The why or wherefores: The words ‘prior to the grant of options or SARs’ are added in the New Regulations primarily to address the issue arising on account obtaining in-principle approval after grant and exercise. It was asserted by the Expert Group that this practice might cause delay in allotment because of non-receipt of such approval as the regulator may determine that the listed entities are non-compliant or the scheme is not in accordance with SBEB Regulations.

13. Role of compensation committee w.r.t. buy-back of options

Part B to the Schedule-I of the New Regulations provides that the compensation committee shall prescribe the procedure for buy back of securities issued under SBEB scheme.

The whys and wherefores: Buy back of stock options have been mentioned under the Companies Act, 2013 as well as the SEBI Buyback Regulations, however, there is no standard procedure to implement the same. Before we first understand what is the amendment, we need to know the concept of buy back of stock options.

A situation for buyback of stock option is likely to occur when the option holder is not willing to exercise the said option for reasons like, fall in share prices leading to the exercise becoming unattractive, lack of funds in the hands of the option holder etc. Under such a situation, if the company wants to pay cash to the option holder instead of the shares, the same can be done by buying back the options held by the option holders. The Expert Group in the Consultation Paper has also mentioned about a situation where due to a regulatory requirement; issuance of shares is not possible and consequent to which the company decides to pay cash instead of issuing shares. While a practical case under the situation stated by the Expert Group may not be ascertained as of now, however, it has been thought of a probable situation for carrying out buy back of options. Further, buy back of options is likely to happen for those which have been vested.

The Expert Group was of the view that flexibility in formulating requisite terms and conditions and procedure for buy back of options would be more meaningful rather than setting out a framework requiring all listed companies to follow a standard procedure in this regard. The requirement for setting out the terms and conditions of schemes to be formulated by the compensation committee was provided under the circular issued previously in this regard. However, the same did not include an express provision relating to procedure and terms and conditions for buy-back including permissible sources for financing the buy-back, minimum financial threshold to be maintained, quantum of securities to be bought back etc.

14. Consolidation of SEBI Circulars

SEBI Circular dated July 15, 2021, provided for immediate vesting of options, SAR or any other benefits in the event of death of an employee. In the said circumstance the requirement of minimum vesting period of 1 year has been done away with. The same has been prescribed under regulation 9(4) of the New Regulations, which stipulates that the options shall vest immediately from the date of death in the legal heirs or nominees of the deceased employee, thus doing away with the minimum vesting requirement.

Further, various disclosure requirements had been prescribed under SEBI Circular dated June 16, 2015, relating to contents of the trust deed, terms and conditions to be formulated by the compensation committee, matters to be stated in the explanatory statement, disclosure to stock exchanges and by the board of directors, etc. The said disclosures have been incorporated under the New Regulations as part C to the Schedule-I with certain additional disclosures like period of lock-in and terms & conditions for buyback, if any, of specified securities covered under these regulations.


15.Vesting of benefits on retirement or superannuation

Explanation as added to the Regulation 9(6) under the New Regulations stipulates that where employment is ceased due to retirement or superannuation then options, SAR or any other benefits granted to an employee would continue to vest in accordance with their respective vesting schedules even after retirement or superannuation in accordance with company policies and applicable law.

The whys and wherefores: Regulation 9(6) of the erstwhile SBEB Regulations stipulated that in case of cessation of employment on account of resignation or termination, benefits which are granted and not vested as on that day shall expire. However, there was a confusion as to the applicability of the concerned provision in case of cessation due to other reasons. In order to bring clarity, the Expert Group recommended that cessation of employment on account of retirement or superannuation should be left out of the ambit of regulation 9(6). In order to provide leniency in special circumstances, it is now explicitly inculcated in the New Regulations that the options, SAR or any benefits granted to an employee and not yet vested would not expire on cessation of employment due to retirement or superannuation and the same will continue to vest in accordance with the vesting schedule.

16. Cashless Exercise

The New Regulations, like the erstwhile SBEB Regulations, do not specifically define the term ‘cashless exercise’ however, have prescribed certain transactions which shall be covered under the ambit of cashless exercise. Regulation 3(15)(a) of the New Regulations stipulate that following is the process pursuant to which cashless exercise may be undertaken:

  1. to enable the employee to fund the payment of the exercise price,
  2. To enable the employee to fund the payment of the amount necessary to meet his/her tax obligations and other related expenses pursuant to exercise of options granted under the ESOS.

The whys and wherefores: Since the term ‘cashless exercise’ was not defined under the erstwhile SBEB Regulations, the Expert Group was of the view that a clarity w.r.t the ambit of transactions that would be covered under the concerned term would be helpful and accordingly, the present change is introduced.

17. Changes pertaining to provisions of sweat equity shares

The New Regulations have combined the SBEB Regulations with the SEBI (Issue of Sweat Equity) Regulations, 2002. Under the New Regulations, there are certain changes introduced with respect to the provisions relating to sweat equity shares.

  1. Purpose of issuance of sweat equity shares: The purpose of issuance of sweat equity shares was not previously specified under the erstwhile regulations. Regulation 30 of the New Regulations provides for permitted purpose/objective for issuance of sweat equity shares which are in accordance with the current provisions of the Companies (Share Capital and Debentures) Rules, 2014.
  2. Maximum quantum of shares: Vide a newly inserted provision, the New Regulations under regulation 31 have prescribed for a maximum limit on the quantum of sweat equity shares that may be issued by a listed company. The regulations have prescribed a cap of 15% of the existing paid up capital on the issuance done in a year and further state that the total quantum of sweat equity shares issued by a company shall not exceed 25% of the paid up equity capital at any time. This is in line with the Companies (Share Capital and Debentures) Rules, 2014.

Further, the New Regulations provide for relaxation with respect to quantum of sweat equity to be issued by companies which are listed on Innovators Growth Platform i.e the overall limit of 50% of the paid-up equity share capital of the company at any time upto 10 (ten) years from the date of its incorporation or registration.

  1. Lock-in requirement: Regulation 38 of the New Regulations has made the lock-in period for equity shares issued under sweat equity consistent with the lock-in period prescribed in relation to preferential issue under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). The rationale for the change is to make sweat equity shares more attractive, by doing away with the lock-in period of 3 (three) years under the erstwhile regulations.
  2. Pricing: The erstwhile provisions prescribed for a specific mechanism for determination of price of sweat equity shares, which stated the higher amount of the average of weekly high and low prices of the period as specified was to be considered. However, the pricing mechanism of sweat equity shares has now been aligned with the provisions relating to preferential issues under ICDR Regulations by the New Regulations via Regulation 33.

The whys and wherefores: The new Regulations have now provided clarity that companies may issue sweat equity shares only for the prescribed purposes. Further, by specifying the quantum of sweat equity shares that can be issued, the New Regulations have inculcated a clarity and increased the scope of compliance.

18. Definition of “Promoter Group Company” and its impact throughout the Regulations

The erstwhile SBEB Regulations [regulation 2(1)(v)] while referring to the definition of promoter group under the ICDR Regulations, stated that in case the promoter or promoter group is a body corporate, the promoters of such body corporates shall also fall under the ambit of the definition. Regulation 2(1)(dd) of the New Regulations has omitted the said proviso, thus making it in line with the definition as stated under ICDR Regulations.

Recommendations that couldn’t form part of the New Regulations

There were certain recommendations of the Expert group that were discussed, however, the same were not made part of the New Regulations since majority of them did not stand the test of necessity for inclusion. These include:

  1. Inclusion of trust shareholding under the ambit of public shareholding.
  2. Explicit recognition of employee stock options under managerial remuneration under the New Regulations.
  3. Relaxation of compliances for trust under SEBI (Prohibition of Insider Trading) Regulations, 2015.
  4. Approval of stock exchange for acquisition by trust via secondary acquisition.
  5. Delegation of responsibilities by compensation committee pertaining to approval of schemes and other matters.
  6. Specification of pricing guidelines or disclosure requirements for determination of exercise price.