Corporate Laws Amendment Bill: Easing, Streamlining and Updating the Regulatory Framework
– Team Corplaw | corplaw@vinodkothari.com
The Statement of Objects and Reasons refers to the Govt’s constant “endeavour to facilitate greater ease of doing business for corporates”; after reading through the provisions of the Bill, that indeed seems to be the intent, though, as happens often, the intent may get miscarried. The provisions are admittedly inspired by the recommendation of the 2025 High Level Committee on Non-financial Regulatory Reforms.
Broadly, the Bill focuses on decriminalisation, streamlining of provisions, bringing more audit quality oversight with powers to NFRA, regulation of the profession of valuations, etc. While doing so, it also makes the provisions of the State more aligned to present day realities, permitting greater digitisation, recognising concepts such as stock-appreciation rights or similar share-related benefits, etc. Note that the Bill has been referred to the Joint Parliamentary Committee.
Directors and KMPs
- Directors related
- Independence criteria for Independent director
- Clarification u/s 149(6)(e)(i) and (ii) referring to disability of a person to be appointed as ID in case of his association with the appointee company, its holding, subsidiary, associate or their auditor for not just “three financial years immediately preceding the financial year” but also “or during the current financial year”.
- Amount of transaction allowed with a legal or consulting firm whose employee / partner / proprietor may be appointed as the ID of the company / its holding / subsidiary / associate has been changed from “10% or more of the gross turnover of such firm” to “amounting to 10% or such lower per cent., as may be prescribed of the gross turnover of such firm”
- Where the transaction of such legal or consulting firm with the company, its holding or subsidiary or associate company is less than the prescribed thresholds, the ID may continue his association with the legal or consulting firm
- Clarification: that every ID shall ensure that he continues to fulfil the requirements specified under sub-section (6) during the term of his appointment.
- The restriction in respect of appointment or association in any other capacity during cooling off period of three years is applicable to the company as well as its holding, subsidiary or associate company.
- Clarification: any period during which an ID has served as an additional director of the company, shall be included in his tenure as an ID
- Additional director
- An additional director may hold office up to the date of the next general meeting or up to a period of three months from the date of his appointment, whichever is earlier.
- Restriction for appointment of a person not considered / approved to be director in a general meeting
- a person whose appointment as a director could not be considered or could not be approved in a general meeting, shall not be appointed by the Board as an additional director, or alternate director or a director against a casual vacancy without the prior approval of its members
- Disqualifications of a director
- Clarified: While sec 188 has been decrimilarised since 2020, the respective reference u/s 164(1)(g) was not amended. Post amendment, a person has been subjected to a penalty for default under section 188 of the said Act will be disqualified from appointment.
- an auditor or a secretarial auditor or a cost auditor or a registered valuer or an insolvency professional of the company or its holding, subsidiary or associate company discharging the functions as such under the Act or under the IBC during the immediately preceding three financial years or during the current financial year, shall be disqualified to be appointed as a director.
- What or who is a “fit and proper person”
- Criteria shall be prescribed in the rules
- Reduces the period of non-filing of financial statements or annual returns from “3 financial years” to “2 financial years” so that companies are more diligent in filing such documents within time.
- Default of sec 164(2) will lead to vacancy of office in every company where he is a director (including the company which is in default under that sub-section), after six months from the date of incurring such disqualification or upon expiry of his tenure in such company, whichever is earlier. Proviso to sec 167(1)(a) also proposed to be amended. Of course, the automatic vacation of office takes place 6 months after the disqualification. This may result in a curious situation where every director of a defaulting company gets disqualified, leaving the company headless. How does a headless company ever come out of the default is a curious question.
- Independence criteria for Independent director
- Board Meeting
- Small companies / OPC and dormant companies may have one BM in a calendar year against the requirement of one BM in each HY.
- Subsequent disclosure u/s 184(1) will be required only in case of any change in the disclosures made and not “at the first meeting of the Board in every financial year”.
- Sec 185 (clarification)
- LLPs are also covered along with firms u/s 185(1)(b) i.e company cannot extend loan / guarantee/ security in connection with loan to even LLPs where the directors / their relatives are partners
- Resignation by whole time Non director KMP – New insertion 203A.
- CFO, CS may resign giving notice in writing to the company,
- Board shall take note and shall intimate the RoC:
- In case of failure to intimate RoC by Board, said KMP may forward a copy of his resignation along with detailed reasons for his resignation to the RoC
- Resignation takes effect from the date on which the notice is received by the company or the date, if any, specified by such KMP in the notice, whichever is later. This is, again, surprising as KMPs are not only office-holders, they are also bound by the contractual terms of their employment. It is unthinkable to think of an employment contract that allows an office holder at that level to resign with immediate effect. While the very intent of this provision is difficult to understand, in our view, the only way to align this with employment contracts is to say that for giving the notice u/s 203A, the KMP shall have to adhere to the employment contract.
- Such KMP will be liable even after his resignation for the default for which he was liable during his tenure.
- Secretarial Audit – Sec 204
- Allowing multi disciplinary firms with majority of PCS as partners to undertake secretarial audit
- Directors Report
- Additional disclosure in directors report:
- While the management is required to explain or comment on every observation, comment or adverse remark of auditor, specific attention has been made to comment on matters relating to:
- financial transactions
- matters which have any adverse effect on the functioning of the company
- maintenance of accounts
- details in respect of composition of the ACB and where the Board had not accepted any recommendation of the ACB, a statement along with the reasons for the same
- While the management is required to explain or comment on every observation, comment or adverse remark of auditor, specific attention has been made to comment on matters relating to:
- Additional disclosure in directors report:
Issuance and buy of securities
- Private placement offences become more punitive: Proposed amendment to increase the penalty for private placement offences to Rs 2 crores or up to the amount involved in the placement, whichever is lower. This may potentially relate to some of the so-called private placements against which adjudication orders were made by some registrars. Read our related articles
- More flexibility for Buyback of shares [Sec 68]
- Power to prescribe different percentage of maximum buy-back value (based on aggregate of paid-up capital and free reserves) for prescribed class of companies
- Currently the maximum buy-back size is 25% of aggregate of paid-up share capital and free reserves for all classes of companies
- It appears that the government may offer more flexibility for scaling down business by companies; notably, the tax provisions for buybacks were rationalised by the Finance Act, 2026.
- Enabling prescribed class of companies to make upto two buyback offers in a year; with minimum gap of 6 months between closure of first buyback offer and opening of second buyback
- Such enabling clause is proposed for companies that are debt-free
- Currently, minimum time gap between two buyback offers shall be atleast 1 year
- Doing away with the requirement of affidavit for declaration of solvency by the directors
- Power to prescribe different percentage of maximum buy-back value (based on aggregate of paid-up capital and free reserves) for prescribed class of companies
- Share capital of IFSC companies
- Section 43A inserted
- Companies set up and incorporated in IFSC are allowed to convert, issue and maintain capital in permitted foreign currency
- IFSCA will prescribe regulations.
- Books of accounts, financial statements and other records to also be aligned to be prepared in the permitted foreign currency unless IFSCA permits to maintain these in Indian rupees
- Companies set up and incorporated in IFSC are allowed to convert, issue and maintain capital in permitted foreign currency
- Section 43A inserted
Presently, the Companies Act does not include specific provisions to enable companies to prepare accounts or financial statements in foreign currencies. Taking into account the nature of companies set up in IFSC jurisdiction, this is a welcome change. It also seeks to clarify that such companies shall pay fees, fines and penalties under the Companies Act and the rules made thereunder in Indian rupees.
- Recognition of other forms of share-linked benefits, such as SARs, RSUs etc.
- Inclusion of reference to “or such other scheme linked to the value of the share capital of a company” in certain provisions, such as:
- Issue of shares to employees on preferential basis in addition to ESOPs [Sec 62(1)(b)]
- Class of security holders to be excluded while counting the number of allottees in a financial year for private placement limits [Sec 42(2)
- Reason – executive compensation is issued with approval of shareholders
- Enabling buyback of such securities [Sec 68(5)(c)]
- Inclusion of reference to “or such other scheme linked to the value of the share capital of a company” in certain provisions, such as:
- Come-back provision: Trust not to be recognised as member [Sec 88(2A)]
- The good old principle of CA 1956, that no notice of trust shall be taken in the register of members, subsequently removed in CA 2013, is now finding its way again.
- Quite likely, the trigger may have been FATF concerns, to ensure that beneficial ownerships are not garbed under the so-called notice of trust.
- However, the classic principle that companies shall not recognise holding of shares in fiduciary capacity belongs to the bygone era where shares were partly paid, and companies had difficulty in claiming money from the contributories. In recent practices, the law specifically requires noting of beneficial interest [sec. 89] – hence the relevance of this provision is difficult to understand.
Dividend and IEPF
- Dividend and IEPF
- Clarified that the dividend not paid / claimed on the shares which has been transferred to IEPF, shall also be transferred to IEPF
- Clarified that amounts in respect of shares bought back and extinguished, remaining unpaid or unclaimed for seven or more shall be credited to IEPF
Audit and Auditors
- Audit and auditors
- Non audit services
- an auditor or audit firm of prescribed class or classes of companies shall not provide, directly or indirectly, any non-audit services to the company or its holding company or subsidiary
- restriction under s. 144 shall also apply for a period of 3 years after the auditor or audit firm has completed his or its term u/s 139(2)
- Fine prescribed for sec 143 (except sub-section 12) and sec 146
- This will mean, if the auditor is not attending the general meetings, he shall be liable to fine and punishment under sec 147(2)
- Cost Audit
- Empower the Central Government to provide standards of cost accounting by rules, after examination of recommendations of the Institute of Cost Accountants of India.
- Non audit services
NFRA
- Strengthening NFRA – Sec 132
- NFRA shall be a body corporate
- Chairperson shall have the power of general superintendence and direction of affairs of NFRA.
- the executive body of NFRA may, by way of a general or special order in writing delegate such of its powers and functions as it considers necessary to the chairperson
- NFRA can give orders relating to imposing penalty or debar the member of the firm
- NFRA can also give warning or censure to the member or the firm or may require additional professional training of the member or the firm or can also refer the matter to central government for taking action
- any person who fails to comply with any order of the NFRA u/s 132(4) or fails to pay the penalty imposed shall be liable to punishment with imprisonment, fine and further period of debarment.
- NFRA shall meet at such times and places as specified by regulations of the said authority.
- Appointment of secretary and such other employees shall be done by the NFRA.
- No act or processing of NFRA shall be invalid merely by the reason of-
- (a) any vacancy in, or any defect in the constitution of such Authority; or (b) any defect in the appointment of a person acting as a member of such Authority; or (c) any irregularity in the procedure of such Authority not affecting the merits of the case. Subsection(16) to be inserted
- Intimation of registration details of auditors and filing of returns – Section 132A
- No firm shall be appointed as auditor unless the individual or firm intimates the details of his or its registration with the ICAI, to the NFRA within such time.
- The auditors shall file such documents or returns or information with the NFRA, , as may be specified by regulations by the said Authority
- Non compliance with the above provision shall attract penalty of not less than twenty-five thousand rupees, but which may extend to five hundred rupees for each day during which such default continues, subject to a maximum of twenty-five lakh rupees, if such person is an auditor or an audit firm
- If a person while performing his duties under this section, knowingly furnishes false information, omits material facts or wilfully alters/suppresses/destroys required documents he shall be liable to penalty of not less than fifty thousand rupees, but which may extend to one thousand rupees for each day during which such default continues, subject to a maximum of fifty lakh rupees, if such person is an auditor or an audit firm.
- Section 132B
- The CG may make grants to the NFRA.
- NFRA fund shall be created and the following shall be credited there:
- Grants by the Central government
- All fees received by the authority
- All sums received by the said authority from such other sources
- Interest or other income received out of the investments made by NFRA.
- The fund shall be applied for meeting the expenses of NFRA for the discharge of its functions.
- NFRA can now give directions to the certain classes of companies as it considers appropriate.
- NFRA can hold inquiry and it shall have power to summon and enforce attendance of any person
- There are some more changes relating to NFRA which are not very relevant.
Corporate Social Responsibility
- Corporate Social Responsibility
- Enhancing applicability threshold of net profit from 5 crore to 10 crore under 135(1)
- Enable additional time period for transfer of unspent CSR amounts relating to ongoing projects to the Unspent CSR Account from “30 days” to “90 days” i.e extending the time till 29th day of June of each year.
- Companies having minimum CSR spent u/s 135(5) up to 1 crore (or such other higher amount) need not constitute the CSR Committee [sec 135(9)]
- New insertion: prescribed class or classes of companies which fulfil prescribed conditions shall not be required to comply with the section
Schemes
- Easing of Schemes of arrangements
- An important and welcome change: Schemes of arrangement will not require adjudication by multiple NCLTs in case of multiple states. Proviso to sub-section (1) allows the matter to be disposed of by the NCLT of the transferee or resulting company’s jurisdiction. Currently, a lot of time is lost as each Bench continues to wait for the orders of the other.
- In case of fast track mergers, applications are filed before jurisdictional RD by transferee/ resulting company, and in cases where the RD found that the application is not in public interest or in the interest of the creditor, RD is required to file an application to the Tribunal. Now, such application is to be made to the Tribunal having jurisdiction over the transferee/resultant company only.
- In case of demerger, a report from OL will not be needed.
- Fast Track mergers [Sec 233]
- The amendment reduces approval requirements in the following manner- –
- In case of members, twin test approval will be applicable. i.e. ‘Majority in number representing 75% in value of the members present and voting’
- In case of creditors, 75% majority in value will suffice as opposed to the present 90%..
- Central Government gets power to make rules procedures with regard to fast track mergers u/s 233.
- The amendment reduces approval requirements in the following manner- –
- A new Section 233A has been introduced, dealing with ‘Treasury shares’
- While sec 230 and 232 specifically provides that any treasury shares arising as a result of a compromise or arrangement shall be cancelled and extinguished, however treatment w..r.t. Shares held prior to commencement of CA, 2013 are not provided in the Act.
- To avoid misuse of voting rights vide such treasury shares, Section 233A now provides a three-year sunset period requiring all existing treasury stock in entities to not carry voting rights after such period.
- Consequence of non compliance with the above is also prescribed as follows-
- In case of failure to comply within the prescribed period of 3 years, such shares shall be cancelled or extinguished, and such extinguishment or cancellation will be treated as capital reduction
- Further, non compliance will attract a penalty of Rs. 10,000/- per day during which the default continues to the company and every officer in default.
IBBI to be Valuation Authority; valuers get significant powers and responsibilities
- IBBI – Appointed as “Valuation Authority” and entrusted with the powers to grant certificate to Registered Valuers and Valuers’ Organisation and imposing penalties in Registered Valuers
- Appointment of a valuer will be done with audit committee resolution:
- The new requirement that appointment of valuers will have to be done by the audit committee should be read with sec 247 (1) – it only relates to such valuations as are required under the Act.
- Several powers, including those for regulation making, are proposed to be given to IBBI.
Striking off names of defunct companies – [Sec 248]
- Conditions for strike off names by RoC becomes to introduce other grounds
- non happening of any significant accounting transaction in the preceding 2 years and in the current FY.
- Meaning of significant accounting transaction same as u/s 455
- Additionally, has not filed financial statements or annual returns that were due to be filed for two consecutive financial years preceding the previous financial year
- An illustration to clarify the same has also been inserted.
- In case of opting for striking off by companies, ‘manner of extinguishing liabilities’, to be prescribed vide Rules
- The offence relating to filing an application for strike off in violation of the prescribed conditions has been decriminalised by replacing the penal provision with a monetary penalty
- Earlier– Punishable with fine which may extend to Rs. 1,00,000
- Now: Liable to a penalty of Rs. 50,000
- non happening of any significant accounting transaction in the preceding 2 years and in the current FY.
- Revival application u/s 252
- If made within 3 years of striking off, application to be filed before RD
- If made after 3 years but before 20 years, application to be filed before NCLT
- Incorporation related
- Declaration from professionals required at the time of incorporation only if their services are engaged in the formation or incorporation of such company [Sec 7(1)(ba)]
- Ease of compliances
- Charges related
- Additional time for registration of charges for prescribed class of companies (for e.g. – small companies)
- 120 days instead of existing 60 days from creation of charge after payment of such ad valorem fees as may be prescribed.
- Additional time for registration of charges for prescribed class of companies (for e.g. – small companies)
- Auditor appointment (small companies)
- Class of companies like small companies to be prescribed who, upon fulfilment of the prescribed conditions, shall not be required to appoint auditors under Chapter X.
- Charges related
- Moving towards digitalisation
- Powers to prescribe certain class of companies that will be required to maintain a website, an email address and other modes of communication [Sec 12A]
- The class of companies will be listed companies or other unlisted public companies meeting prescribed thresholds
- The form and manner of these modes will be prescribed
- Details of website, e-mail address and other modes of communication, and the changes therein shall be intimated to the Registrar in the prescribed manner and timeline
- Powers to prescribe class of companies that will be required to service prescribed class of documents to their members only through electronic means [proviso to Sec 20(2)]
- Manner in which members may seek physical copies will be prescribed
- Enable holding of AGM and EGM in fully physical/ virtual/ hybrid mode in the manner prescribed under the rules [Sec 96 and 100]
- However, mandatory to hold AGM in physical mode atleast once in every 3 years
- Number of members referred to in sec 100(2) may put requisition for the meeting to be held in a hybrid mode
- For fully virtual EGMs, notice period to be reduced from 21 clear days to 7 days or such period and manner to be prescribed by the rules
- Powers to prescribe certain class of companies that will be required to maintain a website, an email address and other modes of communication [Sec 12A]
- In case of specific requisition by members to hold meeting in hybrid mode, mandatory to conduct meeting in such form
- Penalty and prosecution
- Fixed penalty prescribed in place of a range of penalty
- The penal proposals inter-alia include the following:
| Section | Action | Existing Penalty | Proposed Penalty |
| 4(5)(ii) | Name applied by furnishing wrong or incorrect information | Upto 1 Lakh | 50, 000 |
| 42(10) | Makes offer or accepts money in contravention of sec. 42 | Upto money raised through private placement or 2 crore, whichever is lower | Money raised through private placement or 2 crore, whichever is lower |
| 128(6) | MD, WTD, CEO fails to comply with Section 129 | 50,000 – 5,00,00 | 5,00,000 – listed company and 50,000 -any other company |
| 166(8) | Director violated the provisions of sec. 166 except sub-section (5) | 1 lakh – 5 lakh | Listed company – 5 lakhOther company – 2 lakh |
| 189 | Fails to comply with provisions w.r.t Register of contracts or arrangements in which directors are interested | NA | 2 lakh |
| 446B | Lesser Penalty for certain companies | In case of Company- upto 50% of penalty specified in provisions upto 2 lakh In case of officer in default or any other person- upto 50% of penalty specified in provisions upto 1 lakh | In case of Company- 50% or such per cent not exceeding the 50% penalty prescribed in such provision upto 2 lakh In case of officer in default or any other person-50% or such per cent not exceeding the 50% penalty prescribed in such provision upto 1 lakh |
- Fixed penalty in case of non-compliance under sec 152, 155, 156. Also fixing a maximum penalty upto 5 lakh in case of continuing non-compliance.
- Decriminalisation of offences under following provisions, including:
| Section | Action | Existing FIne | Proposed Penalty |
| 128(6) | MD, WTD, CEO fails to comply with Section 128 | 50,000 – 5,00,000 | 5,00,000 – listed company and 50,000 -any other company |
| 147(1) | Punishment for contravention of provisions of sections 139 to 146 | Company- Fine – 25,000 – 5,00,000 OID – Fine – 10,000 – 1,00,000 | Company – Penalty – 1,00,000 – 5,00,000 OID – Penalty – 25,000 – 1,00,000 |
| 166(7) | Default in complying with Section 166 except sub-section (5) | Director – 1,00,000 – 5,00,000 | Listed company – 5,00,000Any other Company – 2,00,000 |
| 167(2) | In case a Director continues as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications | Director – 1,00,000 – 5,00,000 | Listed company – 5,00,000Any other Company – 2,00,000 |
- Realigning the financial year to the period ending on 31st March
- Companies / body corporates which have changed their FYs pursuant to NCLT approval, may realign it back to period ending 31st day of March of the following year though:
- Approving the application; or
- On commercial consideration
- Companies / body corporates which have changed their FYs pursuant to NCLT approval, may realign it back to period ending 31st day of March of the following year though:
- Expansion of definition of small companies
- increasing the upper limit of paid-up share capital to Rs 20 crore from existing 10 crore and upper limit of turnover to Rs 200 crore from existing 100 crore [sec 2(85)]
Compounding of certain offences [Sec 441]
- Increase of amount of fine involved to INR 1 crore for the RD to take up compounding matters
Miscellaneous [Sec 447- 470]
- Increase in limit of amount involving fraud
- The threshold for applicability of fraud leading to minimum 6 months imprisonment increased to 25 lacs instead of 10 lacs. Any fraud involving an amount lesser than that also liable to face imprisonment which can extend to 5 years and/or fine of 1 crore rupees (earlier 50 lacs rupees).
- Decriminalisation of certain offences like improper use of word ‘limited’ or ‘private limited’
- CG reserves the power to issue guidelines circulars and directions , for clarifying the intent of a provisions or laying out the procedural requirement with or without holding consultation with experts
- Non disclosure of source of information where investigation has been probed by into SFIO
- In the context of ‘Dormant Company’, significant accounting transaction also excludes receipt or payment not relatable to the business or operations of the company
- Adjudication of Penalties
- Assistant Registrar additionally may be appointed as adjudicating officers for adjudging penalty
- CG to notify additional appellate authority in addition to RD, not below the rank to Joint Director
- Appointment of Recovery officer for recovering penalty under the Act from persons who fail to pay with power to attachment and sale of movable and immovable property [Sec 454B]
- Constitution of “Specified Authority” for conducting the settlement proceedings for contraventions which shall be liable for penalty under Act [Sec 454C]
Read our coverage on the amendments proposed in the LLP Act, 2008 here.
Partly Paid Shares – Whether Doppelganger of Share Warrants?
– Pammy Jaiswal and Saket Kejriwal | corplaw@vinodkothari.com
Background
In recent times, the use of partly-paid shares has seen some traction[1] where several listed companies[2] came up with issuance of partly-paid shares[3]. While the law provides for the issuance of partly-paid securities, it is important to understand how this instrument has not been used merely as a capital-structuring tool, but arguably, as a regulatory workaround. An analogy may be drawn to a situation where a customer is allowed to purchase a valuable by paying a token money today and pay the full consideration after a period of say 1-2 years at the same price which prevailed at the time of payment of token money. Specifically, promoters and investors appear to be utilizing partly-paid shares as a substitute for share warrants, by paying a minuscule part of the value of shares as a part of application money and the balance payment is allowed to be made at any time in the future, sometimes after an unreasonably long time.
In this article, we argue that the issue of such partly-paid shares is as good as issuing share warrants, However, circumventing the challenges associated with warrants.
Fundamentals of Share Warrants
Ashare warrant is a security issued by a company that grants its holder the right/option to subscribe to equity shares of the company (i.e. Future Equity) at a predetermined price, within a predetermined period, upon the upfront payment of a token amount referred to as the option premium.
Legal Context
A share warrant, being marketable in nature, provides a right in securities, therefore, it is treated as a security under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Some of the relevant legal provisions would include:
- Sections 42, 62 and other relevant provisions of the Companies Act, 2013; and
- The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Key Features
- Right to Decide: A share warrant allows an investor to subscribe to the company’s equity shares in the future, typically at a price lower than the anticipated market price at the time of exercise. Conversely, if the market price at the time of exercise falls below the pre‑determined price, the investor may choose not to subscribe, thereby limiting their loss to the option premium paid (i.e., the upfront cost), rather than incurring the full loss arising from the difference between the initial/subscription value and the reduced market price.
- Option Premium: The upfront amount paid for obtaining this right is called the option premium i.e. if the current market value of shares is Rs.100, then the issuer may issue equity shares immediately at Rs.100, or Issue a share warrant where the investor pays Rs. 10 upfront for the right to subscribe the equity at Rs. 100 in the future. If, at the time of exercise, the market price of the share has risen to Rs. 120, the investor benefits from locking the price at Rs. 100, making the Rs. 10 upfront cost worthwhile. Conversely, if the market price falls to Rs. 50, the investor may choose not to exercise the warrant, limiting the loss to Rs. 10 i.e. option premium. This forms a part of the net worth of the company. For details on option pricing, may refer to our resource on Option Pricing Model.
- Forfeiture: If the warrant holder chooses not to exercise the right, the upfront option premium is forfeited.
Pricing
The value of option premium is generally determined by Black Scholes Model, Binomial Options Pricing Model or Monte Carlo Simulation Method. The most appropriate method for calculation of option premium, in the context of companies using warrants as a regulatory workaround, is the Simulation Method.
One of the key features of share warrants is that the longer the life of the option, there is a higher probability of its price being high. In accordance with the above models, issuing share warrants for an extended period can raise the option premium to a point where it becomes undesirable. Therefore, it is recommended that the life of a warrant should be just and reasonable, and that it should not be used as a substitute for long‑term convertible instruments such as OCDs, CCDs, CCPS, or other similar securities.
Difference between warrants and partly-paid up shares
While both partly‑paid shares and warrants involve an upfront payment towards a future right in equity shares, they differ significantly on the following points:
| Basis of Difference | Partly-Paid Shares | Share Warrants |
| Right and Obligation | Holder is obligated to pay the remaining call money when demanded by the company. Failure to pay will lead to forfeiture of the subscription and call money received by the company. | Holder has a right, but not an obligation, to subscribe to equity shares at a future date. |
| Nature of Investment | These are equity shares issued with part of the value paid upfront, making the holder a shareholder of the company. | These are options issued for a premium, entitling the holder to subscribe for equity shares in the future. |
| Valuation | Shares are subscribed at fair value computed as on the date of making the first subscription/ call money | Shares are subscribed at current fair value on a future date along with payment of option premium |
| Shareholder Rights | Partly-paid equity shareholders enjoy rights proportionate to their paid-up amount. | No rights until conversion. |
Why are partly-paid shares doppelgangers ?
Partly-paid shares in its usual nature when used for capital needs in tranches serves the permitted purpose for this concept was introduced, however, this benefit becomes a governance concern when it is used as an alternative to share warrants and as evident from the table above, the two differ in various aspects. The primary reason for this mirroring lies in valuation. In the case of share warrants issued with a longer tenor, the cost of the warrant, representing the right to subscribe to future equity, tends to be higher when calculated using fair value methods, making this option impractical. As an alternative, many companies have opted to issue partly-paid shares, allowing an investor to pay only a minimal upfront amount (similar to the option premium in the case of a warrant) as part of the application money and reserving the right with the investor to infuse the remaining funds for a longer period like 5-10 years which would not be possible in case of warrants as the premium will increase drastically, if calculated as per fair value methods.
Token money to secure allotment of shares
It is imperative to note that in case of share warrants, the price paid upfront is the option premium which is basically the price paid to get the equity at the current value at the future date as against in case of partly-paid shares, where the investor becomes a shareholder on the first payment date by even paying a nominal part amount reflecting the fair value (consisting of part face value and proportionate premium) as on the date of making such first payment. The catch lies in the fact that there is no legal prescription on the maximum time within which a company needs to make the final call on such partly-paid shares (except in case of IPOs) which in case of warrants runs up to 18 months for listed securities as well as size of the calls which in the case of listed companies requires at least 25% of the consideration amount calculated as per the formula for exercise price[4] with reference date being the record date shall be received at the time of option premium.
One may argue that, given the fundamental difference between the two instruments is that one comes with a right (warrants) and the other with the security (partly-paid shares), they can not be used as substitutes as in case of partly-paid shares the right to call money lies with the Board and the investor is obligated to pay on demand, failing which shares may be forfeited, resulting in the loss of upfront amount paid.
On the other hand, a share warrant gives a right to the investor to decide when, or even if, to make the payment. If the investor chooses not to exercise the option, the upfront money paid is still forfeited, with the key difference being that the loss occurs at the investor’s discretion.
The above argument is valid theoretically. However, in practice, this mirroring is frequently used by start‑ups, which are generally incorporated as private companies. In such cases, although the ‘right to call money’ rests with the Board of Directors, the Board itself typically comprises the promoters i.e. the very investors who subscribe to these mirrored partly-paid shares or in the case of external investors/subscribers, their appointed representatives form an integral part of the Board. As a result, the obligation on the subscriber to pay the balance can, in reality, be viewed more as a right, given that it is exercised by a Board largely aligned with the interests of the investors themselves.
Additionally, partly-paid shares provide several benefits to the investor, like proprietary rights, chances to book profits in case of transfer, etc.We have discussed the same below:
Proprietary interest of partly-paid shares
Partly-paid shares are not merely rights in equity shares but allotment of the shares itself. Once an investor pays the subscription money/ first call, the shares are allotted to the investor who becomes a shareholder immediately and gets ownership rights from day one. Having said that, while the benefits arising out of such ownership is proportional to the amount paid up on the shares, it still dilutes the stake of the other investors who hold fully paid up shares.
The investor’s economic risk is lower compared to a fully paid-up shareholder since only part of the share price has been paid, the investor’s capital at risk is limited to the amount actually contributed, while the ownership position in the company already stands created.
Chance to book profits by transfer of partly-paid shares
If an investor who has paid only a nominal amount intends to sell such shares for reasons like liquidity or apprehension of the investee not doing well for some reason, he stands a chance to make profits on the part payment where the fair value of such shares have appreciated at the time of such transfer. A purchaser can acquire ownership interest by paying only the fair value of the amount paid-up, while the remaining payment is effectively locked in at the historical fair value. This allows the investor to benefit from future upside without proportionately funding the company at the prevailing fair value for the unpaid portion, which remains priced at the value as on the date of issuance.
Imagine a situation where Mr. A invests in the partly-paid up equity shares of XYZ Ltd. The fair value of the equity shares is say INR 150 (face value INR 10) where Mr. A invests only INR 30 as paid up amount. Thereafter he decides to sell these partly-paid shares to another investor after 2 years by which time the balance amount is still uncalled. The transfer of these partly-paid shares would be done at a fair value where lets assume the value of the shares have appreciated and as a consideration, Mr. A receives INR 80 as the sale consideration and also passes on the legacy of holding partly-paid shares to the buyer.
However, this issue does not arise in listed companies, where market mechanisms ensure fair price discovery.
An Ideal partly-paid share
Situation where a partly-paid share shall not be considered as a share warrant
In our view, partly‑paid shares should be supported by a concrete plan or blueprint specifying when the call money is expected to be raised along with its purpose. This includes:
- A defined timeline for making the call on unpaid money;
- A specific purpose for which the call money will be used; and
- An upfront subscription amount that is significant and reflects commitment, rather than being a token.
Even if an exact date cannot be determined, it is advisable to link the call to milestones/events ,such as regulatory approvals, project launches, or specific capital needs, rather than leaving it open-ended. This approach distinguishes a legitimate capital-raising intent from doppelganger design of warrants.
Situation where a partly-paid share shall be considered as a share warrant
A partly-paid share may raise regulatory concerns when above conditions do not exist. This includes situations where the initial application amount is nominal, resulting in minuscule capital infusion. Additionally, if the call structure is vague and lacks a defined timeline or commercial justification, it creates ambiguity around the company’s intention to actually raise the remaining capital. The concern is further amplified when the Board of Directors, which holds the discretion to make the call on these partly-paid shares, is influenced or controlled by the very investors who subscribed to these shares. In such scenarios, the obligation to pay the balance amount may become just theoretical.
Conclusion
The intention behind partly-paid shares is to raise capital while allowing the issuer to secure future source of funding, However, when a minuscule amount is paid at the time of subscription of partly-paid shares and the remaining calls are deferred for a long period without any definite /concrete plan, this raises concern as sighted above and from a valuation perspective may not be seen as a partly-paid shares.
[4] Regulation 67 of SEBI ICDR, 2018
Read more:
Share warrants under cloud – are companies not allowed to issue share warrants?
Piercing through subjectivity to reach out for SBOs
ROCs uncovering SBOs through publicly available information
– Pammy Jaiswal and Darshan Rao | corplaw@vinodkothari.com
Introduction
The framework for SBO identification can be traced back to the recommendations of the Financial Action Task Force (FATF), a global watchdog for combating money laundering and terrorist financing. Section 90 of the Companies Act, 2013 (‘Act’) read with its Rules translates the recommendations into provisions for enforcing the concept, with two broad manners of identification methods. The first being the objective test where the shareholding is picked up through the layers to see the type of entity and the extent of holding to identify the SBO for the reporting entity. The second is the subjective test where the aspects of control and significant influence are evaluated from all possible corners to reach the SBO. It is generally seen that the objective test is the most common way for SBO identification, however, in most of the cases where the regulator has made the identification, it has held the hands of subjectivity. As a follow-up to the LinkedIn case[1], we have discussed a few other rulings where the RoC has taken diverse ways under the subjectivity armour to reach out to the SBOs. The article also explains the principles of law that emerge from every case law, giving a broader angle to the readers on the ever evolving corporate governance norms in the context of SBO identification.
Some of the aspects via which SBOs have been identified in the rulings discussed in this article are as follows:
- Control over the Board of the listed overseas parent
- CEO in relation to and not only of the Pooled Investment Vehicle
- Financial dependence and control established via usage of common domain name
- Erstwhile promoters obligation to disclose where the new promoters are exempt for the then time period
We have discussed these in detail in the following paragraphs to inform the way RoCs went on a spree to unearthen the SBOs taking shields of the language of the existing legal provisions around SBO identification.
Subjectivity facets for SBO identification
As discussed above, the two broad subjective tests for SBO identification are right to exercise or the actual exercising of significant influence or control over the reporting entity. It is imperative note the relevance of stating both the situations as a potential to become SBO for the reporting, being:
- Right to exercise significant influence or control [note here that actual exercise is not a prerequisite]; or
- Actual exercising of significant influence or control.
Further, it is pertinent to note that ‘control’ has been defined under Section 2(27) of the Act to “include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.
Again, the term ‘significant influence’ has been defined under Rule 2(1)(i) of the SBO Rulesas the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.
In the following parts of the article, we will be able to know, the manner in which these aspects have been investigated to reach out for the SBOs.
A. Examining cross holdings, chairmanship and other publicly available data[2]
The Indian reporting entity was a WoS of an overseas listed entity which was a large conglomerate and hence there were several cross holdings in the entities in the top level. There was no declaration of SBO in the given case on account of the argument given that the holding entity is a listed company and hence, there is no individual holding control or significant influence over the said parent. Enquiry was made about the details of the promoters, directors, KMP and shareholders of certain promoter entities as well as chairperson of board meetings and UBO for the reporting company.
Further, upon investigation into the public records of the holding entity, it was found that one particular individual from the promoter category along with his family holds approx 21.46% in the ultimate parent entity and that his son significant stake in two other promoter group entities which in turn holds in the ultimate parent entity of the reporting company.
RoC concluded that the son along with his family members, directly and indirectly exercises significant influence in the ultimate parent. Further, the same person also holds the position of a chairperson in the said entity when the said company already has a full-fledged chairperson already indicating a situation of proxy control through legally remote mechanism. Accordingly, he should have been declared as SBO for the reporting company in India. The snapshot of holding is given below:
B. Individual manager/ CEO related to Pooled Investment Vehicle and not necessarily of the Investment Vehicle[3]
In cases where the SBO is identified via the members holding the reporting company and the ultimate shareholder as such is a pooled investment vehicle, in that case even if there is no individual as a general partner or the investment manager or the CEO of such vehicle, then any individual in relation to the pooled investment vehicle and not necessarily of such a vehicle can be regarded as an SBO. In this case the CEO of the investment manager was considered as an SBO since he was the one responsible for the decision making of such investment manager and hence, relevant for investment decisions of the vehicle.
While arriving at the conclusion of this ruling, RoC clearly indicated that the legislative scheme of Section 90 ensures that at the end of every ownership chain, a natural person(s) must be identifiable as the SBO. Companies cannot rely on the complexity of foreign fund structures or the absence of direct nominees to evade compliance; the obligation to investigate and file BEN forms lies squarely on the Indian company. The ROC implicitly aligned Indian law with FATF Recommendations 24 and 25[4], emphasizing that beneficial-ownership disclosure extends through investment vehicles, LLPs, and trusts
C. Financial / Business Dependency, Usage of common domain name, KMPs of foreign parent employed in Indian reporting company[5]
In a very interesting case where 100% of the shares were only held by a few individuals, RoC concluded that even in such entities identification of SBO is still possible on account of assessment of several factors. These include the reporting test as well as financial control test. In such cases, one may consider evaluating the business dependency in terms of supply to or from the reporting entity, other clues like entities with a common domain name, similarity in trademark, procurement policies.
In this case it was investigated and consequently observed that the shareholder of the reporting company held a controlling stake in the overseas supplier entities on which the reporting company had the highest dependency. Further, the RoC also found out that both the reporting company and these supplier entities had applied for a similar trademark. Further, these entities were reported to be under the common control of an individual who happens to be the director as well the majority shareholder of the reporting company. It is also imperative to note that one of the director-cum senior employees and another senior employee are the ones who have been shown as the supervisor and UBO for the overseas supplier entities.
In this ruling, RoC also referred to the FATF Guidance[6] on control in cases with no shareholding. It includes the following means:
- Control through positions held within a legal person: Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances. Depending on the legal person and the country’s laws, directors may or may not take an active role in exercising control over the affairs of the entity.
- Control through informal means: Furthermore, control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. Further, when an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.
D. Current exemption gets overruled by past obligation to declare[7]
ROC held clearly in this case that the current holding structure even though exempt from the disclosure requirements pursuant to Rule 8 of the SBO Rules, the same will still be subject to penal actions where the declaration was not made as and when applicable in the period prior to qualifying for such exemption.
Concluding Remarks
On perusal of each of these rulings, it becomes clear that no matter how complicated or how simple the corporate structure is, the regulators will leave no stone unturned while carrying on their investigation for finding the real SBOs. Regulators have the determination to uncover SBOs who exercise control behind every legal entity.
A few measures that can be adopted include establishing robust frameworks to continuously track changes in shareholding and control arrangements, maintaining detailed documentation of every ownership and control analysis conducted and filing all SBO disclosures promptly with the Registrar of Companies (RoC). It is also imperative that suitable amendments are made to define the ‘ultimate beneficial owner’ (UBO) rather than the ‘significant beneficial owner’. To some extent, this can be helpful to those corporations with several layers of entities to identify the UBO, although the process would lose its viability considering the scale and extent of tracing.
However, the concern that remains is that the exercise to trace the origins of relationship may prove to be an onus on entities apart from the penal consequences it carries in case of non-compliance.
[2] In the matter of Samsung Display Noida Private Limited
[3] In the matter of Leixir Resources Private Limited
[4]FATF Beneficial Ownership of Legal Persons
[5] In the matter of Metec Electronics Private Limited
[6] FATF Beneficial Ownership of Legal Persons
[7] In the matter of Shree Digvijay Cement Ltd
Control based SBO identification beyond the current legislation
Widening the Net of Fast-Track Mergers – A Step Towards NCLT Declogging
– Barsha Dikshit and Sourish Kundu | corplaw@vinodkothari.com
Introduction
The recent notification of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025, (‘Amendment’) by the MCA represents a significant move towards further declogging the burden of NCLTs and promoting a more business-friendly restructuring environment. By introducing minor procedural refinements and widening the classes of companies eligible for FTM, the amendments make this route accessible to a larger segment of the corporate sector.
The fast-track merger (FTM) route was introduced under Section 233 of the Companies Act, 2013 (“the Act”), allowing certain classes of companies to get the schemes approved by Regional directors having jurisdiction over the Transferee Company instead of filing of application/ petition before NCLTs having jurisdictions over transferor and transferee company and getting the same approved after following lengthy proceedings. Basically, the FTM route was designed to ease the burden of NCLTs, with a simplified process and a deemed 60-day timeline for completion, making it a quicker and a more cost-effective alternative.
This article explores the key changes introduced through Amendment, the opportunities they create for faster and more economical reorganisations, and the practical considerations and potential challenges that companies may face while opting for this route.
Additional classes of companies can opt for the fast-track route:
Section 233 of the Companies Act, 2013 read with Rule 25 of the CAA Rules, 2016, presently allows the following classes of companies to undertake mergers under the fast-track route:
- Two or more small companies;
- Merger between a holding company and its wholly-owned subsidiary;
- Two or more start-up companies;
- One or more start-up companies with one or more small companies.
Often referred to as the “RD Route” in general parlance, the key features of a FTM, include the elimination of NCLT approval, replaced instead by confirmations/approvals from the RoC, OL, members/creditors representing 90% in value, and lastly an order by the jurisdictional RD confirming such merger. [Read the procedure here]
The key change introduced is to extend the benefit of the RD route beyond the presently eligible companies to include the following additional classes:
- Scheme of arrangement between holding (listed or unlisted) and a subsidiary company (listed or unlisted) – regardless of being wholly-owned
Until now, only mergers/demergers between WOS(s) and holding companies were permitted under the existing fast track route. However, pursuant to the recent Amendment, merger/demerger between subsidiaries (not limited to wholly-owned ones) and their holding companies are also allowed under FTM route. This effectively removes the ‘wholly-owned’ limitation and extends the benefit to any subsidiary, whether listed or unlisted.
However, it is worth noting that the fast track route will not be available in cases wherein the Transferor company (whether holding company or subsidiary) is a listed company. That is to say, while subsidiaries can be merged with/demerged into a holding company or vice versa under the fast track route, this is only permissible when the transferor company is not a listed company.
- Scheme of arrangement between two or more Unlisted Companies
Another significant addition is to allow fast track schemes between two or more unlisted companies subject to certain conditions as on 30 days prior to the date of inviting objections from regulatory authorities u/s 233 (1) of the CA, 2013:-
- None of the companies involved should be a section 8 company;
- total outstanding loans, debentures and deposits for each company must be less than ₹200 crores , and
- There must be no default in repayment of any such borrowings.
All the aforesaid conditions are required to be satisfied on two occasions viz. within 30 days prior to the date of inviting objections from the regulatory authorities u/s 233(1) and on the date of filing of declaration of solvency in form CAA-10. The latter is to be accompanied with a certificate of satisfaction of the conditions above, by the auditor of each of the companies involved, in a newly introduced form CAA-10A, which will form part of the annexure to the respective declarations of solvency.
It is pertinent to note here that no common shareholding, promoter group, or common control is required between the unlisted companies seeking to merge under this route. In other words, even completely unrelated unlisted companies can now opt for a fast track merger, provided they meet the financial thresholds and other prescribed conditions.
- Scheme of arrangement between two or more Fellow subsidiaries
As of now, inter-group arrangements, like schemes between two or more fellow subsidiaries, were excluded from the purview of the FTM route. However, the Amendment now brings schemes between fellow subsidiaries – i.e., two or more subsidiary companies of the same holding company – within the scope of Section 233, provided that the transferor company(ies) is unlisted. Notably, the requirement of being unlisted is applicable only to the transferor company/ies. That is to say, the Transferee Company can be a listed company.
While the amendments have commendably widened the ambit of fast-track mergers to include mergers between fellow subsidiaries and step-down subsidiaries, a regulatory overlap with SEBI LODR framework may still persist. Under Regulation 37 of the SEBI LODR read with SEBI Master Circular dated June 20, 2023, listed entities are required to obtain prior approval from stock exchanges before filing a scheme of arrangement. This requirement is waived only for mergers between a holding company and its wholly-owned subsidiary.
Given that earlier fellow subsidiaries/ step down subsidiaries were not permitted to opt FTM Route, in an informal guidance, SEBI clarified that this exemption does not extend to structures involving step-down subsidiaries merging into the ultimate parent, thereby requiring compliance with Regulation 37 in such cases.
Accordingly, while the Companies Act now permits fellow subsidiaries and step-down subsidiaries to utilize the fast-track route, the benefit of exemption from prior SEBI/stock exchange approval may not be available, particularly in cases where the transferee company is listed. Unless SEBI extends the exemption framework, listed entities may still need to follow the standard approval process under Regulation 37, which could offset some of the intended efficiency gains of the FTM mechanism
- Reverse Cross-Border Mergers involving Indian WOS of foreign companies
While cross-border mergers are governed under Section 234 of the Act and Rule 25A of the CAA Rules, it is amended to absorb the merger between a foreign holding company and an Indian wholly owned subsidiary, currently covered under sub-rule (5) of Rule 25A, into Rule 25 itself to make the index of companies eligible under the FTM route more comprehensive and complete.
The additional compliances applicable in such instances are the requirement to obtain prior approval from the RBI, and submission of declaration in form CAA-16 at the stage of submitting application, in case the transferor holding company happens to share a land border with India.
Implications and Potential Practical Challenges
NCLTs are overburdened with the Companies Act cases and IBC cases. As a result, scheme of arrangement cases often receive limited attention and are subject to significant delays. The recent amendments are undoubtedly a step forward in simplifying and accelerating mergers/ demerger processes. However, certain aspects of implementation may give rise to procedural challenges that warrants careful consideration: :
- Seeking approval of shareholders and creditors particularly when the transferee company is a listed company
Section 233(1) of the Act requires approval of the members holding 90% of the total number of shares. This threshold has been observed to be onerous, not just practically, but also duly recognised in the CLC Report, 2022, as the requirement is approval by those holding 90%cent of the company’s total share capital and not 90% of shareholders present and voting. This threshold becomes particularly difficult to achieve in the case of listed companies and may significantly delay the approval process, thereby defeating the very objective of fast-tracking mergers.
This was a practical difficulty faced by companies going through this route, as the approving authority i.e. the RDs, of different regions, did not take a consistent approach, some of them warranting compliance with the letters of law. However, with practice it has been observed that obtaining approval of the requisite majority as present and voting is also accepted as sufficient compliance.
Here, it also becomes important to note that the approval threshold is more stringent in case of FTMs, as compared to arrangements under the NCLT route, which requires a scheme to be approved by three-fourths in majority in an NCLT convened meeting, but the same is again offset by the time and cost involved.
- Scheme where transferor company(ies) / demerging undertaking has immovable properties
The NCLT, constituted under Sections 408 of the Companies Act, 2013, is a quasi-judicial body whose orders carry significant statutory weight and are widely recognized by authorities such as land registrars for purposes like property registration and mutation. Concerns may arise w.r.t. the validity of the RD’s order on such schemes. In this regard, it is to be noted that Regional directors function as an extended administrative arms of the Central Government and orders issued by the RD, are legally on par with those of the NCLT. However, an area of concern remains w.r.t. transfer of immovable property as such a transfer is required to be registered with the local registrars, where practically, RD approved schemes may not be having the same effect as that of NCLT approved scheme.
- Deemed Approval within 60 Days
Section 233 (5) of the Act requires RD’s to either approve the Scheme within the period of 60 days from the date of receipt of scheme or to file an application before NCLT, if they are of the opinion that such a scheme is not in public interest or in the interest of the creditors.
The section also provides that if the RD does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme, and the Scheme will be considered as approved. This “deemed approval” mechanism is in line with international practices, where intra/inter-group restructurings are not typically required to undergo intensive regulatory scrutiny, and schemes are considered approved once sanctioned by shareholders and creditors. For instance, the Companies Act of Japan (Act No. 86 of July 26, 2005) and the Companies Act, 2006 (UK) does not require specific approval of any regulatory authority, except in certain specific circumstances.
It is also important to note that the RD does not have the power to reject a scheme outright. As held by the Bombay High Court in Chief Controlling Revenue Authority v. Reliance Industries Ltd., that the order of a Court itself constitutes an instrument as it results in the merger and vesting of properties inter-se the merging parties. In cases of deemed approval, there seems to be a gap on whether the shareholder and creditor approved scheme is to be itself construed as the instrument of transfer, as there is no explicit approval order of the RD sanctioning the scheme. On the other hand, if the RD believes the scheme is not in public or creditor interest, the appropriate course is to refer the matter to the NCLT. In such cases, the fast-track process effectively resets, and the scheme follows the standard route before the NCLT, potentially undermining the objective of speed and efficiency that the fast-track mechanism aims to achieve.
- Power of RD vis-a-vis NCLT
For schemes sanctioned by the NCLT, any amendment or variation thereto can be carried out by making an application to the tribunal, by way of an interlocutory application, and NCLT, after considering the observations of the regulatory authorities, if any, has the power to pass necessary orders. That to to say, for the Schemes originally sanctioned by the NCLT, any amendment thereto will also be done by NCLT and not any other forum. Here, a question may arise as to whether the RD, which is the ultimate authority to approve fast track schemes, has similar power, or it has to refer the application seeking amendments to the schemes originally approved by it to the NCLT?
It is a settled principle of law that the authority having the power to approve, only has the authority to allow changes therein. Thus, in case of FTMs, if schemes are originally approved by RD, application for amendment thereto may also be preferred before the RD, unless, the RD itself is on the opinion that the matter requires consideration by the Hon’ble Tribunal.
- Regulatory Approvals in Case of Cross-Border Mergers
Regulation 9(1) of the FEMA (Cross-Border Merger) Regulations, 2018, provides that mergers complying with the prescribed framework are deemed to have RBI approval. Yet, as a matter of process, notices of such schemes must now be served on all relevant regulators, including the RBI, SEBI, IRDAI, and PFRDA, for their comments or objections. This strengthens oversight but could also lengthen timelines, as companies may need to wait for regulator clearances before giving effect to the scheme.
- Administrative Capacity of RD Offices
A further consideration is the capacity of RD offices to process the increased number of cases that the expanded FTM eligibility is expected to generate. While there are nearly 30 NCLT benches handling merger matters across India, there are only seven RDs, each with jurisdiction over multiple states and union territories. The RD already endowed with oversight of conversion of public company into private company, approval in case of alteration of FY, rectification of name, etc., in addition to the widened ambit of FTMs. This concentration of responsibility may create administrative bottlenecks, and timely disposal will be critical to preserve the efficiency advantage of the fast-track route.
Conclusion
The Amendments mark a progressive step towards making corporate restructurings quicker and more efficient by widening the scope of Fast Track Mergers, introducing financial thresholds for unlisted companies, and streamlining procedural requirements. Importantly, a specific clarification has now been inserted to state that these provisions shall, mutatis mutandis, apply to demergers as well, thereby removing any interpretational ambiguity on the subject, modifying the forms as well. If implemented effectively, these changes have the potential to substantially declog the NCLTs while giving companies a smoother, time-bound alternative for reorganizations.
Read more:
Fast Track Merger- finally on a faster track
Budget 2025: Mergers not to be used for evergreening of losses
Rights for wrongs: Potential deprivation of shareholders property rights using mandatory demat rule
– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
The mandatory dematerialisation provisions under the Companies Act, 2013 requires companies to issue their securities and facilitate transfer requests in dematerialised form only. For private companies, the mandate has become effective since 30th June 2025, hence, every private company (barring a small company) is now required to issue securities in dematerialised form only. Not only do new securities need to be in demat format, the shareholders having existing shareholding in physical form are deprived of their shareholding rights in the form of participation in further rights issue, bonus issue etc. The purpose of mandatory demat rule is to bring shareholders and shareholding in companies in a transparent, tractable domain. However, can it be contended that every person who has not dematerialised his holdings is a non existing persona, or deserves to have his property rights defeated and redistributed to other shareholders? Can such a person be compelled to lose his rights entitlement in further issuance brought by the private company? Even more stark, can such a shareholder lose his rights to the accumulated surplus piled up in the company if the board of directors of the company suddenly decides to issue bonus shares? In simple words, can the mandate of dematerialisation, that is applicable on a company, be interpreted for deprivation of shareholders’ property rights?
It is not that Rule 9B is new – since its original notification in October 2023, the applicability of the provisions was deferred from the original applicability date of 30th September, 2024 to 30th June, 2025. However, we need to understand that when it comes to private companies, there are lots of minority shareholders who have not converted their shareholdings into demat form. Reasons could be internal family issues, some issues with respect to holdings, or pure lethargy. Let no one make the mistake of assuming that private companies are small companies – private companies may be sitting with hundreds of crores of wealth – these may be family holding companies, JV companies, or even large companies with a restricted shareholding base. If the company is an old legacy company, for sure, the shares would have been in physical form, and may not have been demated. Now, suddenly, finding the law that has come into force, if the board of directors decides to come out with a bonus, the minority holding shares in physical form will be deprived of their right – which would mean, their share of wealth piled up over the years goes to the other shareholders.
Mandatory dematerialisation prior to subscription to securities
Sub-rule (4) of Rule 9B puts a condition on the securities holders to have the entire holding in demat form prior to subscription to the securities. The relevant extracts are as below:
(4) Every holder of securities of the private company referred to in sub-rule (2),-
XXX
(b) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription
The provision thus explicitly forbids a shareholder from participation in a rights issue or bonus issue – corporate actions that are very much a part of the pre-emptive rights of a person as an existing shareholder.
Seeking mandatory dematerialisation: powers under section 29 of the Act
Note that Rule 9B has been issued in accordance with the powers contained in Section 29 of CA, 2013. The title of section 29 reads as “Public Offer of Securities to be in Dematerialised Form”, indicating the regulator’s intent of requiring mandatory dematerialisation of ‘public offers’. Sub-section (1)(b) of the said section originally referred to ‘public’ companies, however, the term ‘public’ was subsequently omitted, and sub-section (1A) introduced, so as to require the notified classes of unlisted companies to ‘hold’ and ‘transfer’ securities in dematerialised form only. The amendment was brought in 2019, thus, enabling the Government to bring private companies too within the ambit of mandatory dematerialisation.
Bonus issue and the unfair treatment to physical shareholders
Rule 9B(4) explicitly refers to ‘bonus issue’, and states that physical shareholders are ineligible to ‘subscribe to the bonus issue’. First of all, the language of the provision is flawed in the sense that bonus issue is mere capitalisation of profits of the company – there is no ‘offer’ on the part of the issuer, and no ‘subscription’ on the part of the shareholder. The same is proportionally available to all shareholders in the ratio of their existing shareholding.
Since bonus issue leads to capitalisation of profits, there is an effective distribution of profits to the shareholders, though the company does not incur any cash outflow. Depriving a shareholder of his right to bonus issue does not only result in non-distribution of the profits to such shareholder, but also, redistribution of his share of profits to other shareholders. There is a disproportionate distribution of profits, and the physical shareholders stand at a loss.
Unclaimed dividend: why should the treatment not be the same?
A parallel reference may be drawn from the provisions applicable to payment of dividend, through which distribution of profit occurs, with an immediate cash outflow. Section 124 of CA, 2013 requires that any unclaimed/ unpaid dividend be transferred to a separate escrow account, and the details of the shareholders be placed on the website to provide notice to the shareholders for claiming the same. Even if the same is not claimed by the shareholders during the specified period, the same can still not be re-distributed amongst the other shareholders, rather, gets transferred to the Investor Education and Protection Fund, and may still be claimed by the shareholders.
The concept of bonus issue, being much similar to that of dividend, the rights of the physical shareholders should not be compromised and the bonus shares should ideally be set aside in a separate suspense account with any DP. Before keeping such shares in the suspense account the issuer company should send intimation letters to such shareholders at their latest known address.
Listed shares and Suspense Escrow Demat Account
Pending dematerialisation of holdings of a shareholder, any corporate benefits accruing on such securities are credited to the Suspense Escrow Demat Account, and may be claimed by the shareholder. Reg 39 read with Schedule VI of LODR Regulations require all such corporate benefits to be credited to such demat suspense account or unclaimed suspense account, as applicable for a period of seven years and thereafter transferred to the IEPF in accordance with the provisions of section 124 of CA, 2013 read with the rules made thereunder.
How physical shareholders are deprived of their rights to proportionate holding?
Under rights issue, an opportunity is given to the existing shareholders, in proportion to their existing shareholding, to subscribe to the further issue of shares by the company. Thus, any dilution in the voting rights and towards the value of the company is avoided. The alternative to rights issue is through preferential allotment, where the securities may be offered to any person – whether an existing shareholder or otherwise, in any proportion. Since this may lead to a dilution in the rights of the existing shareholders – the same requires: (a) approval of the shareholders through a special resolution and (b) a valuation report from the registered valuer.
Both of the aforesaid are meant to protect the interests of the existing shareholders. On the other hand, in case of rights issue – neither shareholders’ approval nor a fair valuation requirement applies – on the premise that there is no dilution of rights of the existing shareholders.
In fact, rights issue of shares can be, and in practice, are fairly underpriced, since there is no mandatory valuation requirement under the Companies Act, and while there are contradicting judgments on whether or not section 56(2)(x) of the Income Tax Act applies on dis-proportionate allotment under rights issue, the valuation under Rule 11UA may be based on historical values – and hence, may not reflect the fair value of the shares.
Not being entitled to rights is like losing the proportional wealth in a company, resulting in re-distributing the property of the physical shareholders to the demat shareholders. This effectively steals a physical shareholder of his existing holding in the company, that gets diluted to the extent of the disproportionate allotment, and a loss in value on account of the underpriced share issuance.
Listed companies and the approach followed for rights issue
For listed entities, there is no blanket prohibition on subscription of shares by physical shareholders, rather, necessary provisions are created to facilitate subscription to the rights issue by such shareholders as well [Chapter II of ICDR Master Circular read with Annexure I].
- Where the demat account details are not available or is frozen, the REs are required to be credited in a suspense escrow demat account of the Company and an intimation to this effect is sent to such shareholder.
- Physical shareholders are required to provide their demat account details to the Issuer/ Registrar for credit of Rights Entitlements (REs), at least 2 working days prior to the issue closing date.
- The REs lapse in case the demat account related information is not made available within the specified time.
Thus, there is no automatic deprivation of the rights of the physical shareholders to apply in a rights issue, rather, a systematic process is given to facilitate dematerialisation and subscription of shares.
The problem is bigger for private companies: necessitating additional measures
A listed entity has a large number of retail shareholders, however, with very small individual holdings. In contrast is a private company, where the number of shareholders are small and each shareholder would be holding a rather significant share. The larger the share of an individual shareholder, the more he is impacted by the nuisance of depriving participation in a rights issue.
The technical requirement of securities being dealt with in dematerialised form only, cannot give a private company the right to arbitrarily bring up corporate actions to deprive the existing physical shareholders from their rights over the company.
An ideal approach towards preventing companies from taking an unfair advantage of the non-dematerialised holdings of some shareholders vis-a-vis dematerialised holdings of other shareholders would be by requiring them to keep the corporate actions attributable to the physical shareholders in abeyance, pending dematerialisation of securities.
Therefore, for instance, in case of rights issue, along with the circulation of offer letter to the shareholders, a dematerialisation request form may be circulated, requiring the shareholders holding shares physically to apply for such dematerialisation. Pending dematerialisation of the securities, shares may be held in a suspense account or may be reserved for the shareholders in any form, and may be credited to the demat account of such shareholders, once the same is available.
In the absence of any measures for protection of interest of the physical shareholders, the disproportionate treatment to such shareholders pursuant to a corporate action, may be looked upon as the use of law with a mala fide intent, one done with the intent of differentiating between shareholders of the same class – which could not have been possible otherwise, if the shares were held in demat form.
Thus, one may contend that the ‘right’ is used for a ‘wrong’, thus challenging the constitutional validity of such law.
Deprivation of property rights require authority of law
Article 300A of the Constitution of India provides for the right to property, stating that “No person shall be deprived of his property save by authority of law”. The Article has been subject to various judicial precedents, although primarily in the context of land acquisition related matters. The Supreme Court, in the matter of K.T. Plantation Pvt. Ltd. vs State Of Karnataka, AIR 2011 SC 3430, has considered ‘public purpose’ as a condition precedent for invoking Article 300A, in depriving a person of his property.
117. Deprivation of property within the meaning of Art.300A, generally speaking, must take place for public purpose or public interest. The concept of eminent domain which applies when a person is deprived of his property postulates that the purpose must be primarily public and not primarily of private interest and merely incidentally beneficial to the public. Any law, which deprives a person of his private property for private interest, will be unlawful and unfair and undermines the rule of law and can be subjected to judicial review. But the question as to whether the purpose is primarily public or private, has to be decided by the legislature, which of course should be made known. The concept of public purpose has been given fairly expansive meaning which has to be justified upon the purpose and object of statute and the policy of the legislation. Public purpose is, therefore, a condition precedent, for invoking Article 300A.
Failure to dematerialise: can there be genuine reasons or mere lethargy?
One may argue that the shareholders have the responsibility to ensure their holding is dematerialised, and hence, a physical shareholder rightfully suffers the consequences of its own lethargic attitude. However, that should not be considered reason enough to deprive one of its rights to the property legally owned and held by it.
Practically speaking, there may be various reasons for which a shareholder may not be able to dematerialise its existing shareholding in a company, thus becoming ineligible for participation in rights/ bonus issues. For instance, the title of a shareholder might be in dispute, pending which, dematerialisation would not be possible. Another practical issue might be due to loss of share certificates, and the investee company, pending issuance of duplicate share certificates and dematerialisation thereof, may come up with a bonus issue.
Concluding Remarks:
The dematerialisation provisions, brought to do away with bogus shareholders, might be used to steal away the rights of validly existing shareholders, on the pretext of non-fulfilment of a technical requirement. In view of the mandatory issuance in demat form, a physical shareholder might not be able to ‘hold’ the shares pending dematerialisation, however, the same does not snatch away the ‘entitlement’ of the shareholder to such rights, and cannot, at all, be re-distributed to other shareholders. This cannot, and does not, seem to have been the intent of law, however, in the absence of clear provisions requiring the company to hold such rights in abeyance for the physical shareholders, may lead to inefficacy.
Read More:
Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs
-Sikha Bansal, Senior Associate & Harshita Malik, Executive | finserv@vinodkothari.com
Background
The RBI’s regulatory approach to investments by Regulated Entities (REs) in Alternate Investment Funds (AIFs) has undergone a remarkable transformation over the past two years. Initially, the RBI responded to the risks of “evergreening”, where banks and NBFCs could mask bad loans by routing fresh funds to existing debtor companies via AIF structures, by issuing stringent circulars in December 20231 and March 20242 (collectively known as ‘Previous Circulars’). The December 2023 circular imposed a blanket ban on RE investments in AIFs that had downstream exposures to debtor companies, while the March 2024 clarification excluded pure equity investments (not hybrid ones) from this restriction. This stance aimed to strengthen asset quality but quickly highlighted significant operational and market challenges for institutional investors and the AIF ecosystem. Many leading banks took significant provisioning losses, as the Circulars required lenders to dispose off the AIF investments; clearly, there was no such secondary market.
In response to the feedback from the financial sector, as well as evolving oversight by other regulators like SEBI, the RBI undertook a comprehensive review of its framework and issued Draft Directions- Investment by Regulated Entities in Alternate Investment Funds (‘Draft Directions’) on May 19, 20253. The Draft Directions have now been finalised as Reserve Bank of India (Investment in AIF) Directions, 2025 (‘Final Directions’) on 29th May, 2025. The Final Directions shift away from outright prohibitions and instead introduce a carefully balanced regime of prudential limits, targeted provisioning requirements, and enhanced governance standards.
Comparison at a Glance
A compressed comparison between Previous Circulars and Final Directions is as follows –
| Particulars | Previous Circulars | Final Directions | Intent/Implication |
|---|---|---|---|
| Blanket Ban | Blanket ban on RE investments in AIFs lending to debtor companies (except equity) | No outright ban; investments allowed with limits, provisioning, and other prudential controls | Move from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits |
| Definition of debtor company | Only equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor company | Equity shares, CCPSs, CCDs (collectively, equity instruments) excluded | Therefore, if RE has made investments in convertible equity, it will be considered as an investment exposure in the counterparty – thereby, the directions become inapplicable in all such cases. |
| Individual Investment Limit in any AIF scheme | Not applicable (ban in place) | Max 10% of AIF corpus by a single RE, subject to a max. of 5% in case of an AIF, which has downstream investments in a debtor company of RE. | Controls individual exposure risk. Lower threshold in cases where AIF has downstream investments. |
| Collective Investment Limit by all REs in any AIF scheme | Not applicable | Max 20%4 of AIF corpus across all REs | Would require monitoring at the scheme level itself. |
| Downstream investments by AIF in the nature of equity or convertible equity | Equity shares were excluded, but hybrid instruments were not. | All equity instruments | Exclusions from downstream investments widened to include convertible equity as well. Therefore, if the scheme has invested in any equity instruments of the debtor company, the Circular does not hit the RE. |
| Provisioning | 100% provisioning to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme or 30-day liquidation, if breach | If >5% in AIF with exposure to debtor, 100% provision on look-through exposure, capped at RE’s direct exposure5 (see illustrations below) | No impact vis-a-vis Previous Circulars. For provisioning requirements, see illustrations later. |
| Subordinated Units/Capital | Equal Tier I/II deduction for subordinated units with a priority distribution model | Entire investment deducted proportionately from Tier 1 and Tier 2 capital proportionately | Adjustments from Tier I and II, now to be done proportionately, instead of equally. |
| Investment Policy | Not emphasized | Mandatory board-approved6 investment policy for AIF investments | One of the actionables on the part of REs – their investment policies should now have suitable provisions around investments in AIFs keeping in view provisions of these Directions |
| Exemptions | No specific exemption. However, Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds were excluded from the scope of circulars. | Prior RBI-approved investments exempt; Government notified AIFs may be exempt | Provides operational flexibility and recognizes pre-approved or strategic investments.No specific mention of investments through MFs/FoFs – however, given the nature of these funds, we are of the view that such exclusion would continue. |
| Transition/Legacy Treatment | Not applicable | Legacy investments may choose to follow old or new rules | See discussion later. |
Key Takeaways:
Detailed analysis on certain aspects of the Final Directions is as follows:
Prudential Limits
Under the Previous Circulars, any downstream exposure by an AIF to a regulated entity’s debtor company, regardless of size, triggered a blanket prohibition on RE investments. The Final Directions replace this blanket ban with prudential limits:
- 10% Individual Limit: No single RE can invest more than 10% of any AIF scheme’s corpus.
- 20% Collective Limit: All REs combined cannot exceed 20% of any AIF scheme’s corpus; and
- 5% Specific Limit: Special provisioning requirements apply when an RE’s investment exceeds 5% of an AIF’s corpus, which has made downstream investments in a debtor company.
Therefore, if an AIF has existing investments in a debtor company (which has loan/investment exposures from an RE), the RE cannot invest more than 5% in the scheme. But what happens in a scenario where RE already has a 10% exposure in an AIF and the AIF does a downstream investment (in forms other than equity instruments) in a debtor company? Practically speaking, AIF cannot ask every time it invests in a company whether a particular RE has exposure to that company or not. In such a case, as a consequence of such downstream investment, RE may either have to liquidate its investments, or make provisioning in accordance with the Final Directions. Hence, in practice, given the complexities involved, it appears that REs will have to conservatively keep AIF stakes at or below 5% to avoid the consequences as above.
Now, consider a scenario – where the investee AIF invests in a company (which is not a debtor company of RE), which in turn, invests in the debtor company. Will the restrictions still apply? In our view, it is a well-established principle that substance prevails over form. If a clear nexus could be established between two transactions – first being investment by AIF in the intermediate company, and second being routing of funds from intermediate company to debtor company, it would clearly tantamount to circumventing the provisions. Hence, the provisioning norms would still kick-in.
Provisioning Requirements
Coming to the provisioning part, the Final Directions require REs to make 100 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of its direct loan and/ or investment exposure to the debtor company, if the REs exposure to an AIF exceeds 5% and that AIF has exposure to its debtor company. The requirement is quite obvious – RE cannot be required to create provisioning in its books more than the exposure on the debtor company as it stands in the RE’s books.
The provisioning requirements can be understood with the help of the following illustrations:
| Scenario | Illustration | Extent of provisioning required |
|---|---|---|
| Existing investment of RE in AIF Scheme (direct loan and/or investment exposure exists as on date or in the past 12 months) | For example, an RE has a loan exposure of 10 cr on a debtor company and the RE makes an investment of 60 cr in an AIF (which has a corpus of 800 cr), the RE’s share in the corpus of the AIF turns out to be 7.5%. The AIF further invested 200 cr in the debtor company of the RE. | The proportionate share of the RE in the investment of AIF in the debtor company comes out to be 15 cr (7.5% of 200 cr). However, the RE’s loan exposure is 10 crores only. Therefore, provisioning is required to the extent of Rs. 10 crores. |
| Existing investment of RE in AIF Scheme (direct loan and/or investment exposure does not exist as on date or in the past 12 months) | Facts being same as above, in such a scenario, the provisioning requirement shall be minimum of the following two:-15 cr(full provisioning of the proportionate exposure); or-0 (full provisioning subject to the REs direct loan exposure in the debtor company) | Therefore, if direct exposure=0, then the minimum=0 and hence no requirement to create provision. |
Some possible measures which REs can adopt to ensure compliance are as follows:
- Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
- Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
- Require regular, detailed portfolio disclosures from AIF managers;
- appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
- Establish suitable escalation procedures for potential breaches or ambiguities.
Further, it shall be noted that the intent is NOT to bar REs from ever investing more than 5% in AIFs. The cap is soft, provisioning is only required if there is a debtor company overlap. But the practical effect is, unless AIFs develop robust real-time reporting/disclosure and REs set up systems to track (and predict) debtor overlap, 5% becomes a limit for specifically the large-scale REs for practical purposes.
Investment Policy
The Final Directions call for framing and implementing an investment policy (amending if already exists) which shall have suitable provisions governing its investments in an AIF Scheme, compliant with extant law and regulations. Para 5 of the Final Directions does not mandate board approval of that policy, however, Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. In light of this broader governance requirement, it is our view that an RE’s AIF investment policy should similarly receive Board approval. Below is a tentative list of key elements to be included in the investment policy:
- Limits: 10% individual, 20% collective, with 5% threshold alerts;
- Provision for real-time 12-month debtor-exposure monitoring and pre-investment checks;
- Clear provisioning methodology: 100% look-through at >5%, capped by direct exposure; proportional Tier-1/Tier-2 deduction for subordinated units; and
- Approval procedures for making/continuing with AIF investments; decision-making process
- Applicability of the provisions of these Directions on investments made pursuant to commitments existing on or before the effective date of these Directions.
Subordinated Units Treatment
Under the Final Directions, investments by REs in the subordinated units7 of any AIF scheme must now be fully deducted from their capital funds, proportionately from Tier I and Tier II as against equal deduction under the Previous Circulars. While the March 2024 Circular clarified that reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; the same has not been clarified under the Final Directions. However, the scope remains the same in our view.
What happens to positions that already exist when the Final Directions arrive?
As regards effective date, Final Directions shall come into effect from January 1, 2026 or any such earlier date as may be decided as per their internal policy by the REs.
Although, under the Final Directions, the Previous Circulars are formally repealed, the Final Directions has prescribed the following transition mechanism:
| Time of making Investments by RE in AIF | Permissible treatment under Final Directions |
| New commitments (post-effective date) | Must comply with the new directions; no grandfathering or mixed approaches allowed |
| Existing Investments | Where past commitments fully honoured: Continue under old circulars |
| Partially drawn commitments: One-time choice between old and new regimes |
Closing Remarks
The RBI’s evolution from blanket prohibitions to calibrated risk-based oversight in AIF investments represents a mature regulatory approach that balances systemic stability with market development, and provides for enhanced governance standards while maintaining robust safeguards against evergreening and regulatory arbitrage.
Of course, there would be certain unavoidable side-effects, e.g. significant operational and compliance burdens on REs, requiring sophisticated real-time monitoring systems, comprehensive debtor exposure tracking, board-approved investment policies, and enhanced coordination with AIF managers. Hence, there can be some challenges to practical implementation. Further, the success of this recalibrated regime will largely depend on the operational readiness of both REs and AIFs to develop transparent monitoring systems and proactive compliance frameworks.
- https://vinodkothari.com/2023/12/rbi-bars-lenders-investments-in-aifs-investing-in-their-borrowers/
↩︎ - https://vinodkothari.com/2024/03/some-relief-in-rbi-stance-on-lenders-round-tripping-investments-in-aifs/
↩︎ - https://vinodkothari.com/2025/05/capital-subject-to-caps-rbi-relaxes-norms-for-investment-by-res-in-aifs-subject-to-threshold-limits/ ↩︎
- The limit was 15% in the Draft Directions, the Final Directions increased the limit by 5 percentage points.
↩︎ - This cap at RE’s direct loan and/or investment exposure has been introduced in the Final Directions.
↩︎ - Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board.
↩︎ - SEBI, vide Master Circular for AIFs, had put restrictions on priority distribution model. Later, pursuant to Fifth Amendment to SEBI (AIF) Regulations, 2024, SEBI issued a Circular dated December 13, 2024 wherein certain exemptions were allowed and differential rights were allowed subject to certain conditions. See our article here. ↩︎
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