Rights for wrongs: Potential deprivation of shareholders property rights using mandatory demat rule

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– 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.

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Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs

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-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 –

ParticularsPrevious CircularsFinal DirectionsIntent/Implication
Blanket BanBlanket ban on RE investments in AIFs lending to debtor companies (except equity)No outright ban; investments allowed with limits, provisioning, and other prudential controlsMove from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits
Definition of debtor companyOnly equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor companyEquity 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 schemeNot 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 schemeNot applicableMax 20%4 of AIF corpus across all REsWould require monitoring at the scheme level itself.
Downstream investments by AIF in the nature of equity or convertible equityEquity 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.
Provisioning100% 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 breachIf >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/CapitalEqual Tier I/II deduction for subordinated units with a priority distribution modelEntire investment deducted proportionately from Tier 1 and Tier 2 capital proportionatelyAdjustments from Tier I and II, now to be done proportionately, instead of equally. 
Investment PolicyNot emphasizedMandatory board-approved6 investment policy for AIF investmentsOne 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
ExemptionsNo 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 TreatmentNot applicableLegacy investments may choose to follow old or new rulesSee 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:

ScenarioIllustrationExtent 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: 

  1. Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
  2. Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
  3. Require regular, detailed portfolio disclosures from AIF managers;
  4. appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
  5. 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 AIFPermissible treatment under Final Directions
New commitments (post-effective date)Must comply with the new directions; no grandfathering or mixed approaches allowed
Existing InvestmentsWhere 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. 

  1.  https://vinodkothari.com/2023/12/rbi-bars-lenders-investments-in-aifs-investing-in-their-borrowers/ 
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  2.  https://vinodkothari.com/2024/03/some-relief-in-rbi-stance-on-lenders-round-tripping-investments-in-aifs/ 
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  3.  https://vinodkothari.com/2025/05/capital-subject-to-caps-rbi-relaxes-norms-for-investment-by-res-in-aifs-subject-to-threshold-limits/ ↩︎
  4.  The limit was 15% in the Draft Directions, the Final Directions increased the limit by 5 percentage points.
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  5.  This cap at RE’s direct loan and/or investment exposure has been introduced in the Final Directions.
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  6.  Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. 
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  7. 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. ↩︎

Paradox of privacy

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Whether private NBFCs-ML are required to appoint IDs?

– Neha Malu, Associate | finserv@vinodkothari.com

Independent directors have long been regarded as critical instruments of corporate governance. They bring fresh perspectives, specialized knowledge and most importantly, an element of unbiased oversight to board deliberations. Think of them as neutral referees who ensure fair play in business operations and uphold the integrity of boardroom decisions. Their presence helps reduce conflicts of interest, curb excessive promoter influence and encourage more balanced and professionally informed decision-making.

Under the Companies Act, 2013, section 149 read with rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 lays down the categories of companies that are mandatorily required to appoint independent directors[1]. These categories do not include private companies. The rationale is intuitive: private companies, by their very nature of being closely held, are presumed to function under greater internal control, thereby reducing the perceived need for external board oversight. The whole basis of “privacy” of a private company will be frustrated if there are independent persons on its board.

Further, wholly owned subsidiaries are explicitly exempted from the requirement to appoint independent directors under rule 4(2), regardless of their nature or size.

And accordingly, a point of regulatory discussion arises in the case of (i) private NBFCs and (ii) NBFCs that are wholly owned subsidiaries, classified in the middle layer or above under the SBR Master Directions. While the Companies Act, 2013 does not mandate the appointment of independent directors for private companies and explicitly exempts WOS from such requirement, the corporate governance provisions under the SBR Master Directions require the constitution of certain committees, the composition of which hints towards the presence of independent directors.

This gives rise to a key question: Does a private NBFC or a wholly owned subsidiary, solely by virtue of its classification under the middle layer or above, become subject to an obligation to appoint independent directors?

Committees for NBFC-ML and above, the composition of which includes IDs

Upon classification as an NBFC-ML or above, conformity with corporate governance standards becomes applicable. Below we discuss specifically about the committees, the composition of which also includes IDs:

Name of the CommitteeCompositionRemarks
Audit Committee [Para 94.1 of the SBR Master Directions]Audit Committee, consisting of not less than three members of its Board of Directors. If an NBFC is required to constitute AC under section 177 of the Companies Act, 2013, the Committee so constituted shall be treated as the AC for the purpose of this para 94.1.As per section 177, an AC shall comprise a minimum of  three directors, with Independent Directors forming a majority. Hence, in case the NBFC is not covered under the provisions of section 177, the same may be constituted with any three directors, not necessarily being independent directors.
Nomination and Remuneration Committee [Para 94.2 of the SBR Master Directions]Composition will be as per section 178 of the Companies Act, 2013.The provisions indicate that the NRC shall have the constitution, powers, functions and duties as laid down in section 178. In this context, Companies Act requires every NRC to consist of at least three non-executive directors, out of which not less than one-half should be independent directors.
IT Strategy Committee [Para 6 of the Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices]The Committee shall be a Board-level IT Strategy Committee (a) Minimum of three directors as members (b) The Chairperson of the ITSC shall be an independent director and have substantial IT expertise in managing/ guiding information technology initiatives (c) Members are technically competent (d) CISO and Head of IT to be permanent inviteeChairperson of the Committee is required to be an ID.
Review Committee [Master Direction on Treatment of Wilful Defaulters and Large Defaulters]The Composition of the Committee shall be as follows: The MD/ CEO as chairperson; and Two independent directors or non-executive directors or equivalent officials serving as members.Where the NBFC has not appointed IDs, NEDs or equivalent officials to serve as members of the Committee.

Divergent Market Practices

With respect to appointment of IDs on the Board and induction in the Committees, two interpretations are seen in practice in the case of private companies and WOS:

First, since the Companies Act does not mandate the appointment of independent directors in the case of private companies and explicitly exempts WOS, private NBFCs and WOS often rely on these statutory exemptions. The SBR Master Directions make a general reference to the Companies Act without distinguishing between company categories, which further supports the view that these entities constitute the relevant committees without appointing independent directors.

Second, given that NBFCs in the middle layer or above have crossed the ₹1,000 crore asset threshold and fall under enhanced regulatory scrutiny, some take the view that such entities should align with the intended governance standards and appoint independent directors, even if not required under the Companies Act.

Closing thoughts

The SBR Framework takes into account the systemic concerns associated with different NBFCs and thus classifies them into different layers. The corporate governance norms are applicable to ML, UL and TL NBFCs, which, given their asset sizes, are expected to operate at huge volumes and carry a great magnitude of risks. Such NBFCs may have access to public funds (by way of bank borrowings, debenture issuance etc.), wherein large lenders or public would have exposures and consequent high systemic risks. Hence, looking at the constitution (that is whether the NBFC is a private limited or public limited) becomes less important, and looking at the size, activity and function becomes more important. 

Thus, it may not be right to conclude that NBFCs registered as private companies and WOS can do away with the mandatory composition prescriptions merely due to the constitutional form of their entity. Looking at the intent and idea of SBR Framework, the applicable NBFCs may be required to appoint independent directors irrespective of the form of their constitution. The scale-based regulation emanates from the idea that NBFCs having high risk should be effectively monitored. Thus, the regulations should be followed in spirit to effectively mitigate the risks arising in the course of the NBFC’s functioning.

[1] Pursuant to the provisions of section 149(4) of the Companies Act read with rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, following companies are mandatorily required to appoint independent directions: listed companies, public companies having paid up share capital of ten crore rupees or more; or turnover of one hundred crore rupees or more; or having in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees as per the latest audited financial statements.

Read more:

What is a non-banking financial company?
Resources on Scale Based Regulations

Should you expect adjustment in profits for “Expected Credit Loss”?

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– Customised profits for CSR and managerial remuneration under Section 198 of the CA, 2013

– Pammy Jaiswal and Sourish Kundu | corplaw@vinodkothari.com

Background

The presentation of the profit and loss account has been outlined under the Schedule III of the Companies Act, 2013  (‘Act’) and the profit computation method has been provided for under the applicable accounting standards [See IND AS 1]. The basic principle is to showcase a true and fair view of the financial position of a company. Having said that, it is also significant to mention that the Act provides for an alternative method for computing net profits, the basic intent of which is to arrive at an adjusted net profit which does not have elements of unrealised gains or losses, capital gains or losses and in fact any item which is extraordinary in its very nature. The same is contained under the provisions of section 198 of the Act. This section, unlike the general computation method, has a limited objective i.e., calculation of net profits for managerial remuneration as well as corporate social responsibility. 

There are four operating sub-sections under section 198 which provides for the adjustment items:

  1. Allowing the credit of certain items – usual income in the form of govt subsidies
  2. Disallowing the credit given to certain items – unrealised gains, capital profits, etc.
  3. Allowing the debit of certain items – usual working charges, interests, depreciation, etc
  4. Disallowing the debit of certain items – capital losses, unrealised losses, usual income tax, etc

It is important to note that items other than those mentioned above need not be specifically adjusted unless their nature calls for adjustment under the said section. Now if we discuss specifically for items in the nature of Expected Credit Loss (‘ECL’) for companies following IND AS, it is important to understand the nature of ECL in the context of making adjustments under section 198 of the Act. See our write on Expected Credit Losses on Loans: Guide for NBFCs.

Understanding ECL and Its Accounting Treatment

Reference shall be drawn from Ind AS 109 which defines ‘credit loss’ as ‘the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. cash shortfalls), including cash flows from the sale of collateral held.’ ECL is essentially a way of estimating future credit losses, even on loans that appear to be fully performing at the time of such analysis (Stage 1 assets). It is based on expected delays or defaults, and the estimated loss is recorded as a charge to the profit and loss account, based on a 12-month probability of default.

As per Ind AS 109, ECL is used for the recognition and measurement of impairment on financial assets both at the time of origination as well as at the end of every reporting period. ECL is a forward-looking approach that requires entities to recognize credit losses based on the probability  of future defaults/ delays.

However, this does not result in a reduction in the carrying value of the asset (unless the asset is already credit-impaired, i.e., Stage 3). In that sense, while ECL reflects asset impairment, it does not operate like a direct write-down. And unlike conventional provisioning, ECL is not a “provision” under traditional accounting – it is a loss allowance rooted in forward-looking estimations. Further, it is also important to understand that the booking of ECL does not mean that there has been a credit loss in the actual sense, the same is a methodical manner of estimating the probable default risk association with the asset value.

Treatment of ECL under Section 198 

Section 198 requires excluding unrealised or notional adjustments, such as fair value changes or revaluation impacts in terms of Section 198(3) of theAct.

The section also refers specifically to actual bad debts, under  Section 198(4)(o). This raises the natural interpretational question: should model-driven, probability-weighted ECL charges – which do not reflect realised losses – really be allowed to remain deducted while computing such customised profits? Well, the answer lies in the requirement and nature of such an item being required to be deducted from the profit and loss account under IND AS 109.  

Alternative approaches -Treatment of ECL

The question around the treatment of ECL can be viewed from two perspectives. The first being the nature of ECL and the second on the routine treatment and calculation of ECL. If we look at the nature, it is clear that while it is imperative for companies to compute ECL at the time of origination as well as at the end of every reporting period, it is important to note that there is no loss or default in the actual sense. This means that the amount computed as ECL has not been an actual default. 

On the other hand, if we look at the need for such computation and the methodical approach to arrive at the value of ECL, the same is likely to be considered as a usual working charge which is charged to the profit and loss account. Accordingly, we have come across two possible and permissible approaches to the treatment of ECL while computing the profits under section 198. The same has been discussed below with the help of illustrations.

Approach 1: Disallowing ECL in the year of its booking and subsequent adjustment of bad debt

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15		PBT – 1200
Depreciation – 20
ECL – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                  1000PBT                                                                                  1200
Depreciation                                                                     –Depreciation                                                                    –
Add: ECL                                                                            40Add: ECL                                                                            35
Add: Loss on sale of fixed asset                                    15Less: Profit on sale of equity shares                                                    (25)
PBT u/s 198                             1055PBT u/s 198                                  1210

Notes: 

  • ECL has been ignored in profit computation u/s 198 considering the same is an unrealised loss and therefore reversed.
  • Depreciation and actual bad debt has not been adjusted again as it has already been deducted under normal profit computation.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Approach 2: Allowing ECL in profit computation and netting off actual bad debt from the same in subsequent period

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15		PBT – 1200
Depreciation – 20
ECL recovered – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                 1000PBT                                                                                 1200
Depreciation                                                                    –Depreciation                                                                     –
ECL                                                                                     –ECL                                                                                      –
Add: Loss on sale of fixed asset                                   15Actual bad debt                                                                           –
ECL recovered                                                                    –
Less: Profit on sale of equity shares                          (25)
PBT u/s 198                            1015PBT u/s 198                           1185

Notes:

  • ECL has been considered in profit computation u/s 198  and therefore, not adjusted to reverse the impact
  • Similarly, ECL recovered has been considered part of normal or routine adjustment and hence, not reversed.
  • Actual bad debt is not to be considered at the time of profit computation under  the regular computation since it can be adjusted from the ECL already booked.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Concluding remarks

All listed companies are required to comply with Ind AS and given that an instance of a company having nil receivables is a rare occurrence, the discussion on how ECL is to be treated while computing net profit in terms of Section 198 becomes more than just an academic debate.

As long as the impact of any P&L item being extra ordinary in nature is taken off from the profits computed u/s 198, the same serves the purpose and intent of section 198 of the Act. ECL, while valid for accounting, is fundamentally an estimated, non-actual loss. It exists because accounting standards demand alignment of income with credit risk  and not because a real outflow has occurred. However, it cannot be said that ECL already deducted while calculating profit before tax as per applicable accounting standards will be reversed while calculating profits in terms of Section 198. 

Further, given that ECL is based on expectation calculated using due accounting principles, the actual bed debt, if within the ECL limit, does not impact the P&L. On the contrary, in case of the actual bad debt being in excess, the P&L warrants a subsequent debit of the net amount. For example, under approach 2 if the actual bad debt would have been 50, i.e. in excess of the ECL booked in the previous period by 10, the normal profit computation would have allowed a debit of 10.

In fact, both the approaches lead to the fulfilment of the intent of section 198 and hence, it is not necessary to consider any one approach as correct. Having said that, it is imperative to follow uniform practice in this regard in the absence of which the profits u/s 198 may be impacted. 

Therefore, where the statutory and accounting frameworks intersect – but are not necessarily aligned – companies must adopt a carefully considered, principle-based approach as even a single line item like ECL can materially influence the base for managerial remuneration and CSR spending unlike other estimate based items such as revenue deferrals viz. sales returns or warranties, which are made as a matter of accounting prudence, but does not represent outflows for statutory computation purposes. Accordingly, there is no reason for deviating from the Indian GAAP principles for the purpose of customised calculation of net profits for specific purposes. 

Read more: 

Cash in Hand, But Still a Loss? 

Impact of restructuring on ECL computation

Knowledge Centre for Corporate Social Responsibility (CSR)

MCA’s V3 becomes completely operational

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– Team Corplaw | corplaw@vinodkothari.com

This version: 7th June, 2025

MCA Notification on Launch of Final Set of 38 Company FormsDownload

Waiver of dividend by shareholder: Whether generosity can become atrocity?

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– Sikha Bansal, Senior Partner and Simrat Singh, Senior Executive | corplaw@vinodkothari.com

Legal basis for dividend entitlement

The right of a shareholder to receive dividends is conferred under Section 123(5) of the Companies Act, 2013 (‘CA, 2013’). The corresponding obligations on the company are elaborated in Chapter VIII of the Act (Sections 123 to 127), read with the Companies (Declaration and Payment of Dividend) Rules, 2014. For listed companies, Regulations 42 and 43 of the Listing Regulations, 2015 further prescribe a few procedural requirements for declaration and payment of dividend.

However, neither the CA, 2013 nor the Listing Regulations, 2015 recognise a shareholder’s unilateral right to waive the dividend declared by the company.

Waiver by a shareholder – whether dependent on other shareholders

Although the statutory framework does not provide for a waiver, the relationship between the company and its shareholders can, to an extent, be governed by a contract, so long as such contract is not ultra vires the CA, 2013. It is a settled position that the Articles of Association (AoA) of a company form a contract between the company and its members and also inter-se among the members (see Naresh Chandra Sanyal v. Calcutta Stock Exchange Association1).

Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company

As per the Indian Contract Act, 1872 (‘Contract Act’), a proposal becomes a promise, only when it is accepted by the counterparty. A promise takes the form of an agreement which, if enforceable under law, becomes a contract. Therefore, there has to be assent from both the parties, in order to constitute a contract. Where one party only proposes, and the other does not accept, there is no question of a promise/agreement/contract. 

Further, when a shareholder intends to waive his rights as to dividend – such a dividend foregone can be construed as a gratuitous transfer to the kitty of other shareholders – in essence, a gift. Under the settled principles of common law and as per section 122 of Transfer of Property Act, 1882, a gift is valid only when accepted by the recipient. 

122. “Gift” defined.—“Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee

XX

Therefore, for a waiver to operate as a gift benefiting others, it must be accepted by the general body of shareholders who stand to receive this “gift”. Therefore, without the express consent by other shareholders, a request of waiver of dividend by one shareholder cannot be acceded to.

Binding nature of promises under Contract Law

Section 37 of the Contract Act mandates that parties to a contract must perform or offer to perform their respective promises, unless such performance is excused under the Act or any other applicable law. Where under articles of association, a company agrees to declare and pay the dividend, the shareholders agree to receive the same in accordance with the provisions of the articles. Therefore, once a dividend is declared, the company is under a legal obligation to pay it and the shareholder is obligated to receive it. The shareholder cannot unilaterally waive this right unless such dispensation is as per law. 

Here, it might also be relevant to discuss the peripheries of section 63 of the Contract Act, which provides that a promisee may waive or remit performance wholly or in part. But the spirit of this provision is to release the promisor of an obligation, not to impose an additional burden. In Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.2 it was held that a promisee may extend the time for the performance of the promise u/s 63 of the Contract Act. However, the promisor may choose not to accept the extended time if it will hamper the performance of his promise. Therefore, a promisor is not bound to accept any waiver of the promisee, he is allowed to weigh-in his/her own interests. 

Therefore, section 63 does not operate without any boundaries.

Implications of unilateral waiver on the company

Dividend declaration is a strategic financial decision taken by the Board after considering multiple factors such as growth strategy, return on equity, share price impact, liquidity needs, and need for reserves. If a company provides this right to one shareholder, it may have to provide the same right to other shareholders. Therefore, a unilateral waiver by a shareholder could distort this delicate balance in several ways, as it may affect the equitable treatment of shareholders and also impact the company’s policy on retained earnings/general reserves. 

Rebutting section 127 concerns

One may argue that Section 127 of the CA, 2013 which allows shareholders to give directions regarding the “manner of payment” of dividend, empowers them to waive their dividend. However, this is a misreading of the provision. Section 127 pertains to mode and timeline of payment, not the right to forgo the dividend altogether. Refusing to entertain a waiver does not constitute a violation of this section.

Closing thoughts

Thus, what appears to be an act of generosity might actually prejudice other shareholders and strain the company’s governance framework. Therefore, in our view, a shareholder seeking waiver of dividends may have a generous intent – however, that cannot happen without the approval of the general body of shareholders.

  1. 1971 AIR 422, AIR 1971 SC 422 ↩︎
  2. 1958 AIR 512 ↩︎

Ratification of RPTs:  a rescue ship or an alternative to compliance?

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– SEBI brings ratification provisions for RPTs skipping prior AC approval

– Jigisha Aggarwal, Executive and Sourish Kundu, Executive

The laws governing related party transactions (RPTs) in India mandate seeking prior approvals for RPTs. The law has also provided for a rescue in the name of ‘ratification’ where prior approval could not be taken or taking prior approval was not feasible for various reasons. This article explains the meaning of ratification, consequences of failure to ratify either due to lapse of the time limit or exhaustion of the monetary limit, and reinforces the need for companies to tighten their process of RPT approvals. In particular, this article becomes pertinent in view of the recent amendments in Reg. 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) inserting express provisions for  ratification of RPTs by Audit Committee (“AC”).

The ratification provision serves as a remedial measure, offering companies a chance to address regulatory lapses. This naturally raises several critical questions:

  1. Does ratification effectively rectify non-compliance arising from the failure to obtain prior approval?
  2. What happens if the required conditions for ratification by the AC are not fulfilled?
  3. Can material RPTs be ratified by shareholders or does the violation remain unresolved?

These questions and other related concerns are analyzed, explored and discussed in detail in this article.

Meaning of Ratification

In simple terms, ratification means giving formal consent to an act, deed, contract, or agreement that initially lacked the required approval, thereby making it valid. It involves granting consent to an action that has already taken place.

The Latin maxim “Omnis ratihabitio retrorahitur et mandato priori aequiparatur” translates to “every ratification is retroactively placed on equal footing with an act performed with prior authority.” This applies when someone acts on behalf of another without prior consent—if the concerned person later ratifies it, the act is treated as if it had been authorized from the start.

Ratification can be seen as a counterpoint to Admiral Grace Hopper’s well-known saying, “It is better to ask forgiveness than permission.” While this principle supports fast decision-making in large organizations, ratification should remain an exception rather than the norm for post-facto approvals.

The Supreme Court, in the matter of National Institute Of Technology & Anr v. Pannalal Choudhury & Anr [AIR 2015 SC 2846], traced back the meaning of the term “ratification” to a succinctly made definition by the English Court in the matter of Hartman v Hornsby [142 Mo 368 : 44 SW 242 at p. 244 (1897)] as follows:

“Ratification’ is the approval by act, word, or conduct, of that which was attempted (of accomplishment), but which was improperly or unauthorisedly performed in the first instance.”

Further, the Apex Court, in the matter of Maharashtra State Mining Corporation v Sunil S/O Pundikaro Pathak [2006 (5) SCC 96] reiterated the principle of ratification:

“The High Court was right when it held that an act by a legally incompetent authority is invalid. But it was entirely wrong in holding that such an invalid act cannot be subsequently ‘rectified’ by ratification of the competent authority. Ratification by definition means the making valid of an act already done. The principle is derived from the Latin maxim ‘Ratihabitio priori mandato aequiparatur’ namely ‘ a subsequent ratification of an act is equivalent to a prior authority to perform such act’. Therefore ratification assumes an invalid act which is retrospectively validated.”

As explained by the Bombay High Court in Pravinkumar R. Salian v. Chief Minister and Minister of Co-operation, Mumbai [2004(2)MHLJ12],[1] The essential conditions for a valid ratification include the following:

  • firstly, the person whose act is ratified must have acted on behalf of another person;
  • secondly, the other person on whose behalf the act was performed must be legally competent to perform the act the question and must continue to be legally competent even at the time of ratification; and
  • thirdly, the person ratifying the act does so with full knowledge of the act in question.  

As is understood from the jurisprudence around, the following are the broad principles of ratification –

  1. An act which is ultra-vires the company cannot be ratified.[2]
  2. An act which is intra-vires the company but outside the scope of an authority in the company may be ratified by the company in proper form.[3]
  3. Acts can be ratified by passing a resolution.[4]
  4. There can be no ratification without an intention to ratify.[5]
  5. The person ratifying the act must have complete knowledge of the act.
  6. Ratification relates back to the date of the act ratified i.e., has retrospective effect.[6]
  7. Ratification cannot be presumed, i.e., overt steps should have taken for the act of ratification.[7]

Global framework on ratification of RPTs

Ratification of RPTs is not a unique affair prevalent only in the Indian context. Even in the global parlance, regulatory references exist around the same, however, there is no concrete evidence of conditionalities around the same:

  1. The SEC Regulations do not prescribe the requirements with respect to approval, review or ratification, however, companies are required to have policies and procedure in place for dealing in RPTs, viz., approval, review and ratification of RPTs [Item 404(b)(1) of SEC Regulation S-K], to be disclosed as a part of non-financial reporting.  
  2. The newly notified UK Listing Regulations UKLR-8 (notified w.e.f. 29th July, 2024) requires the companies to take  prior approval of the board before entering into an RPT, however, does not elaborate on the manner of seeking ratification if prior approval has not been taken. Further, pursuant to UKLR-8, the shareholders’ approval requirements for RPTs under LR-11 has been substituted with a notification requirement.
  3. Article L225-42 of the French Commercial Code deals with the cancellation of transactions referred to in Article L225-38 (understood to be equivalent to related party transactions) without prior authorisation of the board of directors, if such transactions have prejudicial consequences for the company.  However, such transactions, entered into without prior authorisation of the board, can still be ratified by shareholders through a vote in a general meeting, based on the special report obtained from the auditors on setting out the circumstances due to which  the required approval process was not followed. No interested party can vote on such a matter.
  4. Chapter 2E of the Corporations Act, 2001 of Australia deals with RPTs that require prior shareholders’ approval. Where such approval is not obtained, penal provisions may attract on the persons involved in such violation, although the same does not impact the validity of such contract or transaction except by way of an injunction granted by a court to prevent the company from giving benefit to the related party.

Circumstances that may result in requiring ratification

Practically, there may be genuine cases where the transaction could be blessed with prior approval and therefore be at the mercy of ratification, few cases:

  • Subsequent identification of a related party: Companies maintain a related party list to identify RPTs and ensure necessary controls, including prior approvals. However, an entity/person may sometimes be overlooked / become a related party subsequently, leading to transactions occurring without prior approval.
  • Increase in contract value due to market changes: Market fluctuations can cause price revisions, potentially breaching the ceiling limit of an existing omnibus approval. Until the AC approves an enhancement in the omnibus approval value, any transactions exceeding the OA limit would require ratification.
  • Oversight of transactions: Manual RPT controls are prone to oversight, where a business team may enter into a related party transaction without verifying whether prior approval has been obtained.
  • Exigency of business: In rare cases, an unanticipated but necessary transaction may arise in the company’s interest. Following the legal approval process beforehand might result in lost opportunities or financial losses.

While strong internal controls, automation, and strict monitoring can mitigate most of these issues, obtaining prior AC approval in every case may not always be feasible—especially for large listed entities with numerous RPTs. In such instances, ratification serves as a remedial mechanism.

Ratification of RPTs by Audit Committee

Section 177(4) of the Companies Act, 2013 explicitly allows ratification of RPTs undertaken without prior AC approval for all companies [third proviso to clause (iv) of Section 177(4)]. However, before the LODR (Third Amendment) Regulations, 2024 (effective from December 13, 2024), no such provision existed for listed entities under the Listing Regulations.

With the recent amendment, Reg. 23(2)(f) now extends ratification provisions to listed entities. However, this is not unconditional, as specific criteria must be met, which are discussed in detail later.

The following section examines the differences between ratification provisions under the Listing Regulations and the Companies Act..

Ratification of RPTs by the Audit Committee – Listing Regulations vis-a-vis Companies Act, 2013

BasisListing RegulationsCompanies Act, 2013
Governing ProvisionReg. 23(2)(f)Section 177(4)
Authority to ratifyIndependent directors forming part of the ACAll members of the AC
Permitted valueRs 1 crore, aggregated with all ratifiable transactions during a FYRs 1 crore per transaction
Prescribed timelinesEarlier of:
– 3 months from date of transaction – Next AC meeting		Within 3 months from the date of transaction
What if the value / timeline is exceededTransaction shall be voidable at the option of the AC
Disclosure requirementsDetails of ratifications to be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9)No additional disclosures prescribed
Ratification of material RPTsAC does not have the authorisation to ratify material RPTsNA  
Consequences of not getting AC approval for RPTThe concerned director(s) shall indemnify the company against any loss incurred by the company concerned, if:  i. The transaction is with the related party to any director, or ii. The transaction is authorised by any director

Conditions for ratification of RPTs under Listing Regulations

The trail of AC ratifying an RPT is represented below:

Each condition is discussed in detail below:

  1. Authority to ratify

Only those members of the AC who are IDs, can ratify RPTs.

Rationale: This is to ensure that the authority to ratify is in sync with the authority to approve. In terms of Reg. 23(2), only those members of AC who are IDs are authorised to approve RPTs, and hence, the power of ratification also vests with them only.

Given their role and responsibilities, Independent Directors (IDs) are least likely to have a “conflict of interest”, which is the primary concern behind RPT regulations.

SEBI’s penalty order in the LEEL Electricals case underscores the importance of IDs, as penalties were imposed on them for failing to fulfill their AC duties in overseeing RPTs. The company was penalized for fund diversion involving certain related parties.

  1. Timeline

Earlier of:

3 months from the date of the transaction, or the next meeting of the AC.

Rationale: This is intended to aid in timely decision-making and minimizing the chances for undue delay in scheduling AC meetings. While recommendations were made to keep the provision as later of the two, in view of the probable misuse of such provision by causing deliberate delay in conducting AC meetings, the timeline has been kept at earlier of the two [refer SEBI BM Agenda].

In practice, this does not impose an additional compliance burden, as Reg. 18(2) of the Listing Regulations mandates at least four AC meetings per financial year. Given the AC’s quarterly responsibilities, meetings are typically held within a three-month gap. Thus, a ratifiable RPT is unlikely to fail due to delayed placement, except in cases where weak internal controls cause a significant delay in identifying the lapse in prior approval.

  1. Maximum value permitted for ratification

An aggregate threshold of Rs. 1 crore has been laid down, for ratified transaction(s) with a related party, whether entered into individually or taken together, during a financial year.

Rationale: A low threshold has been specified to prevent misuse of the provision [refer SEBI BM Agenda].

The provision refers to (a) all ratified transactions, (b) in a financial year, (c) with a related party. Hence, all instances of ratification are to be aggregated for the complete financial year, on a per related party basis, and the same should not exceed the value of Rs. 1 crore.

It should be noted that w.e.f. April 1, 2025, pursuant to the Industry Standards Note on minimum information to be placed before the Audit Committee, Minimum Disclosures as prescribed therein is required to be placed before the Audit Committee.

Anonymous omnibus approval vis-a-vis ratification of RPTs

Reg. 23(3)(c) of the Listing Regulations allows the AC to grant anonymous omnibus approval for unforeseen RPTs, with a maximum limit of ₹1 crore per transaction. This approval does not require details like the related party’s name, transaction amount, period, or nature and remains valid for up to one year.

This creates an implied exemption for RPTs up to ₹1 crore per transaction, as they can proceed under the omnibus framework without fresh AC approval. However, unlike this per-transaction limit, ratification limits apply on an aggregated basis for all transactions with a related party in a financial year.

This raises a key question: Does the anonymous omnibus approval provision make ratification redundant?

The aforesaid question can be discussed in two contexts –

  • for unforeseen RPTs covered by the limit of Rs. 1 crore per transaction, and
  • for foreseen RPTs for which an OA limit is approved by the AC

The relevance of ratification in each case can be understood with the help of specific examples.

i. Ratification for unforeseen RPTs

If an anonymous omnibus approval (OA) allows up to Rs. 1 crore per transaction, an unforeseen RPT of Rs. 80 lakhs falls within this limit and does not require ratification, as the OA serves as prior approval for such cases.

However, if an unforeseen RPT of Rs. 1.9 crores occurs, the entire Rs. 1.9 crore would require ratification, and the cover of Rs. 1 crore under the OA cannot be claimed.

In a case where the transaction is Rs. 2.5 crores and the OA is Rs. 1 crore, the entire amount (2.5 cr) exceeds ratification limits and therefore is voidable at the option of the AC.

Another example, where the foreseen RPT is for 1 cr – can this be included under the unforeseen RPTs? The answer should be No. Where the details of the RPT were available, irrespective of the value, they require prior approval of the AC after placing the requisite information before the AC.

ii. Ratification of foreseen RPTs

If the AC grants an omnibus approval for Rs. 100 crores for a specific transaction type with a particular RP, and the company undertakes an RPT of Rs. 101 crores, the excess Rs. 1 crore can be ratified by the AC, provided all specified conditions are met.

However, if a transaction of Rs. 105 crores is undertaken under the same approval, the excess increases to Rs. 5 crores, making ratification unavailable. This falls under “Failure to seek ratification,” discussed in detail below.

  1. Transaction should not be material

Reg. 23(1) sets the materiality thresholds for RPTs as the lower of Rs. 1,000 crores or 10% of the listed entity’s annual consolidated turnover. Transactions crossing this limit require prior shareholder approval.

Rationale: Ratification authority lies with the approving authority. Since AC cannot approve material RPTs, it also cannot ratify them. The authority to ratify remains with shareholders, who must approve such transactions in advance.

Listing Regulations do not explicitly allow shareholder ratification if materiality thresholds are breached. Failure to obtain prior approval leads to penalties, as seen in Premier Polyfilm Limited, where a fine was imposed despite later ratification.

If prior approval is missed, shareholders’ ratification may still be sought. While it does not remove the breach’s consequences, delayed compliance is better than non-compliance.

  1. Rationale to be placed before the AC

Ratification applies only when prior approval was not obtained, serving as a remedy for exceptional cases. It is crucial to present a proper rationale before the Audit Committee, explaining the inability to seek prior approval.

A key principle of ratification is the intent to ratify, as established in Sudhansu Kanta v. Manindra Nath [AIR 1965 PAT 144]. In Premila Devi v. The Peoples Bank of Northern India Ltd [(1939) 41 BOMLR 147], it was held that ratification requires both intent and awareness of illegality. The ratifying authority must have full knowledge of the breach, its reasons, and a justified basis for approval.

  1. Disclosure

The details of ratification shall be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9) of the Listing Regulations.

Pursuant to SEBI Implementation Circular dated 31st December, 2024 the format for half-yearly disclosures of RPTs has been revised to include a column: “Value of the related party transaction ratified by the audit committee” to effectuate the disclosure of ratified RPTs.

Rationale: This is to promote maintenance of adequate transparency of substantial information, with the investors and shareholders.

Failure to Seek Ratification: Meaning & Consequences

A proviso to the newly inserted Reg 23(2)(f) specifies the consequences of a “failure to seek ratification”. The failure to seek ratification refers to a situation where the post-facto approval of AC could not be sought in accordance with the conditions laid down for ratification.

The failure to seek ratification may occur on account of one or more of the following:

(a) lapse of timelines for seeking ratification, or

(b) value of ratifiable transactions exceeding the limit of Rs. 1 crore in a FY, or both.

Here, it is important to note that in such an event, the AC may render such RPT voidable, and not necessarily void. Further, if it considers appropriate, it may seek indemnification from the concerned director(s), if any, for any loss incurred by the Company as a result of entering into such a transaction.

Differentiating between  ‘voidable’ or ‘void’

Voidable means something that can be made invalid or nullified, and void means something that is invalid or null. 

In Pankaj Mehra v. State of Maharashtra [2000 (2) SCC 756], the Supreme Court drew a distinction between “void” and ‘voidable’:

“The word ‘void’ in its strictest sense, means that which has no force and effect, is without legal efficacy, is incapable of being enforced by law, or has no legal or binding force, but frequently the word is used and construed as having the more liberal meaning of ‘voidable. The word ‘void’ is used in statutes in the sense of utterly void so as to be incapable of ratification, and also in the sense of voidable and resort must be had to the rules of construction in many cases to determine in which sense the Legislature intended to use it. An act or contract neither wrong in itself nor against public policy, which has been declared void by statute for the protection or benefit of a certain party, or class of parties, is voidable only.”

If a company fails to seek ratification, the transaction does not automatically become void unless explicitly declared so by the approving authority, usually the AC. The AC has the discretion to either:

  • Adopt the transaction with or without modifications, or
  • Cancel the transaction entirely, rendering it void.

Indemnification by director(s):

If the transaction is deemed invalid, indemnification may be sought from the concerned directors if:

  • The transaction involves a related party of any director, or
  • A director authorized the transaction without obtaining the necessary approval.

Conclusion

With the introduction of ratification provisions in the Listing Regulations, the AC’s responsibility for RPT ratification has increased. This underscores the need for stronger internal control mechanisms to ensure efficiency and proactiveness. Automation of RPT controls should also be considered to reduce human errors and streamline compliance for better detection of RPTs. While ratification serves as a fallback in case of lapses, it should never be seen as a substitute for obtaining prior approvals.

[1] (2004) 2 MahLJ 12.

[2] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.

[3] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.

[4] Bulland Leasing & Finance Pvt. Ltd. v. Neelam Miglani, Delhi District Court, CC No.: 470664/16, 2018,

[5] Sudhansu Kanta v. Manindra Nath, AIR 1965 Pat 144.

[6] Parmeshwari Prasad Gupta v. Union of India, 1973 AIR 2389.

[7] New Fleming Spinning And Weaving Company Ltd. v.  Kessowji Naik, (1885) ILR 9 Bom 373.

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Related Party Transactions- Resource Centre

SEBI strictens RPT approval regime, ease certain CG norms for HVDLEs

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Notifies amendment as COREX timeline set to expire

– Team Corplaw | corplaw@vinodkothari.com

March 28, 2025 | Team Vinod Kothari & Company

Just before the expiry of the ‘Comply or Explain’ timeline of March 31, 2025 for HVDLEs, SEBI notified SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2025 inserting a separate chapter viz. Chapter VA: Corporate Governance Norms for a Listed Entity which has listed its Non-Convertible Debt Securities effective from March 27, 2025. The proposal for amendments were made in the Consultation Papers of October 31, 2024 and February 8, 2023, and was approved by SEBI in the board meeting held on December 18, 2024. A summary of the changes notified, comparison of the new compliance requirements vis-à-vis the earlier norms have been captured in this write-up. 

HVDLEs: Meaning, Applicability, Sunset Clause

The only criteria for being categorized as an HVDLE is the amount of outstanding value of listed non-convertible debt securities, which has now been revised from Rs. 500 crores or more to Rs. 1,000 crores or more. This upward revision is aligned with the criteria for being identified as a Large Corporate, i.e. outstanding long-term borrowing amounting to Rs. 1,000 crores or more, and has been introduced with the dual objective of tightening the regulatory regimes for debt listed entities while simultaneously promoting ease of doing business in the corporate bond market.  

The provisions of the Chapter VA, a chapter exclusive to entities having listed only their non-convertible debt securities, the outstanding value  of which is exceeding Rs. 1,000 crores, and not specified securities, shall apply with effect from April 1, 2025. Explanation(1) appended to Regulation 62C clarifies that HVDLEs shall be determined on basis of value of principal outstanding of listed debt securities as on March 31, 2025, irrespective of the date of notification of this amendment. 

A doubt may arise arise with regards the applicability of this chapter to an entity whose outstanding value of NCDs exceeds the threshold during the year, i.e. after March 31, 2025 – the Explanation(2) to the same regulation makes it clear that such entity shall ensure compliance with the provisions of Chapter VA within six months from the date of such trigger and the disclosures of such compliance may be made in corporate governance compliance report on and from third quarter, following the date of the trigger.

However, the earlier conception of “Once an HVDLE, always an HVDLE” has now been removed with the introduction of a sunset clause, in Regulation 62C(2), which specifies that the provisions of this chapter shall cease to be applicable, after three consecutive years of the value of outstanding NCDs being below the Rs. 1,000 crores threshold, as determined on March 31 of any given year. 

Related Party Transactions by  HVDLEs

While the scope of RP and RPTs continue to be the same as defined in regulation 2(1) (zb) and (zc) respectively, the present amendment introduces a revised RPT approval regime for HVDLEs particularly for Material RPTs. The restriction for related parties to not vote to approve the material RPT, provided under regulation 23, resulted in impossibility of compliance for HVDLEs as most HVDLEs were closely held companies.  Accordingly, SEBI introduced a two step approval process for material RPTs with first obtaining NOC from the debenture holders (of listed debt securities issued on or after April 01, 2025) not related to the issuer and holding at least more than 50% of the debentures in value, on the basis of voting including e-voting, followed with approval of shareholders through ordinary resolution. The provisions of Reg. 62K is applicable to RPTs entered into on or after April 1, 2025. Refer to our FAQs to understand the implications and manner of seeking approval.

While the other requirements are similar to corresponding requirements under regulation 23 for equity listed entities (for e.g., framing of policy, prior approval of audit committee, half yearly disclosures etc.), recent amendments made in December, 2024 in relation to ratification of RPTs and exemption from approval requirements of audit committee and shareholders have not been inserted in reg. 62K.

Prior to this amendment, so long the debt was continued to be serviced and the terms and conditions of borrowing was met, the debenture holders were not required to intervene in the regular operations of the company. If there was a covenant to that effect in the debenture subscription agreement or Debenture Trust Deed or terms of issue, in that case, irrespective of whether the RPT is material or immaterial, the borrowing entity was required to comply. With this amendment, the debenture holders will also have a say in corporate governance, especially in case of material RPTs pursuant to a provision of law. Other lenders extending term loan and other facilities, and who have a larger exposure on such companies, will not have this opportunity.

Differing requirements under CG norms for an HVDLE vis-a-vis an equity listed entity

The provisions of Reg. 16 to 27 of Chapter IV have been suitably modified and inserted in the context of HVDLEs in Chapter VA. While largely the flow of the provisions and requirements are aligned, there exists certain gaps in certain provisions. The tabular comparison below highlights the same (excluding those differences that are linked with market capitalization related requirements/ outstanding SR equity shares related requirements that only apply to equity listed entities): 

ParticularsReqt. under Chapter IV for equity listed entitiesReqt. under Chapter VA for HVDLEs  Remarks
Meaning of IDsDefined under Reg. 16(1)(b)Reg. 62B (1) (b) refers to definition in Chapter IV and additionally provides for considering the NEDs other than nominee directors, in following listed entities: A body corporate mandated to constitute its board as per the law under which it is constituted; or Set up under public private partnership [PPP] model In the case of the PPP model, the composition of the board is pre-decided or mutually decided between the public authority and private entity, hence the exemption. 
Further, for HVDLEs that are private limited companies, having IDs as per the criteria given under Chapter IV, becomes explicit.
Timeline for obtaining shareholders’ approval for board appointments Reg. 17 (1C)
To be obtained within 3 months from appointment or ensuing general meeting, whichever is earlier.
Carve outs: Time taken for obtaining approval of regulatory, government or statutory authorities, shall be excluded.Provisions not applicable to appointment or re-appointment of a person nominated by a financial sector regulator, Court or Tribunal to the board of the listed entity		Reg. 62D
To be obtained within 3 months from appointment or ensuing general meeting, whichever is earlier.
Both the carve outs are not available for HVDLE.

The corrections made to corresponding provision in Reg. 17 (1D) vide LODR Third Amendment Regulations, 2024 have not been made in Chapter VA. The carve out under Reg. 62D (4) pertains to that sub-regulation and not the entire Reg. 62D.
Continuation of director on the  board  subject to shareholders’ approval once in every five yearsCarve outs provided in provisos to Reg. 17 (1D): To the director appointed pursuant to the order of a Court or a Tribunal or to a nominee director of the Government on the board of a listed entity, other than a public sector company, or to a nominee director of a financial sector regulator on the board of a listed entity.To a director nominated by a financial institution registered with or regulated by RBI under a lending arrangement in its normal course of business or nominated by a SEBI registered DT under a subscription agreement for the debentures issued by the listed entity.Carve outs in Reg. 62D (4) are broadly similar. Reg. 62D (4) additionally exempts director appointed under the public private partnership model/structure.As composition is pre-decided or is as per mutual terms between the public authority and private entity.
Nature of listed entities considered and limits  for maximum no. of directorships Reg. 17A- LEs shall be cumulative of those whose equity shares are listed on a stock exchange and HVDLEs.
Director in not more than 7 LEsID in not more than 7 LEsIf WTD/ MD in any LE, ID in not more than 3 LEs 
Further, to give sufficient time to all the listed entities to ensure compliance with the provision, a period of 6 months or till the time AGM is held from the date of applicability of the provision to the entity, whichever is later, has been provided.		Reg 62E provides the same limits. LEs shall be cumulative of those whose equity shares are listed on a stock exchange and HVDLEs.
Carve out for directorships in PSUs and entities set up in PPP arrangements are not to be included. 		In order to ensure that directors devote adequate time to listed entities including HVDLEs and in the interest of investor protection.
Composition of NRC, SRC and RMCReg. 19, 20 & 21:Each of the committees viz. Nomination and Remuneration Committee, Stakeholders Relationship Committee and Risk Management Committee (top 1000 based on market cap) are required to be constituted.Reg. 62G – The functions of NRC may either be discharged by the board or by NRC.Reg. 62H – The functions of SRC may either be discharged by the board or by SRC.Reg. 62I – The functions of RMC may either be discharged by the board or by audit committee or by RMC.In order to avoid the constitution of multiple committees by HVDLEs.
Exemption from  prior approval of AC of the holding  LE, in case, provisions  of Reg 23 is applicable  to the subsidiaryReg 23(2)(d): Prior approval of the audit committee of the listed entity shall not be required for a related party transaction to which the listed subsidiary is a party but the listed entity is not a party, if regulation 23 and sub-regulation (2) of regulation 15 of these regulations are applicable to such listed subsidiary. Reg 62K: Identical provisions, however, position is not clear where the subsidiary is also an HVDLE. The exemption should be available even in case of an HVDLE subsidiary, as such a subsidiary will be required to independently comply with Regulation 62K, similar to that provided in Reg. 62K(6).
Exemption from approval of AC w.r.t. remuneration and sitting  fees paid to Director, KMP and SMP (non-promoter)Reg 23(2)(e): remuneration and sitting fees paid by the listed entity or its subsidiary to its Director, KMP and SMP (non-promote, shall not require approval of the audit committee provided that the same is not material.No such carve out in Reg. 62K (3)The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Ratification of RPTReg 23(2)(f): The members of the audit committee, who are independent directors, may ratify related party transactions subject to the certain conditions and timelinesNo such provisions  are included  in Reg. 62K (3)The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Omnibus approval proposed to  be undertaken by subsidiary  companiesReg 23(3): Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity or its subsidiary subject to the certain conditionsReg 62K: Identical provisions, However, subsidiary companies of HVDLE are not included in the ambit of  omnibus approval  provisions  for  HVDLE The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Approval regime for material related party transactions Reg 23(4): All material related party transactions and subsequent material modifications shall require prior approval of unrelated members. Reg 62K(5): All material related party transactions and subsequent material modifications shall require prior NOC from the DT and the DT shall in turn obtain No-Objection/approval from the unrelated DH who hold atleast > 50% of the debentures in value, on the basis of present and voting including e-voting.
62K(6): approval of shareholders shall be required after obtaining NOC from DT, however, no restriction has been placed on shareholders that are RPs from voting to approve the resolution.  		Several HVDLEs are closely held companies, holding a negligible portion of the equity or none at all, in which case the entity was not able to transact such RPTs because of ‘impossibility of compliance’ with the provisions of LODR Regulations. Therefore, taking cue from Sec. 186 (5), SEBI tried to address this issue by mandating NOC from debenture holders.
Exemption from Material RPT approval in case of listed subsidiariesReg 23(4): Available if regulations 23 and 15 (2) are applicable to such listed subsidiaries.Reg 62K(6): Prior approval of the shareholders and NOC by DT of a HVDLE, shall not be required for a RPT to which the listed subsidiary is a party but the listed entity is not a party, if regulation 62K of these regulations is applicable to such listed subsidiary, however, position is not clear i.r.t. Listed subsidiary, if reg 23  is applicable to such subsidiary. This  situation is inverse for obtaining audit committee approval in case of HVDLE.
In the context of equity listed entities, the exemption is not available in case of Material RPTs undertaken by an HVDLE subsidiary.
Exemption from AC & S/h approval requirements for certain RPTsReg 23(5): Following transactions are exempt from the applicability of approval provisions:
(a) transactions entered into between two public sector companies;(b) transactions entered into between a holding company and its WOS (c) transactions entered into between two WOS of the LE(d) transactions which are in the nature of payment of statutory dues, statutory fees or statutory charges entered into between an entity on one hand and the Central Government or any State Government or any combination thereof on the other hand. (e) transactions entered into between a public sector company on one hand and the Central Government or any State Government or any combination thereof on the other hand. 		Reg 62K(7): The exemptions are not identical:(i) under point (a) exemption available for government companies and not public sector  companies;(ii) point (b) and (c) are identical(iii) point (d) and (e)  are excluded.The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
CG requirements with respect to subsidiaryRequirements of Reg. 24 apply to unlisted subsidiaries.Reg 24 (1) – appointment of atleast 1 ID of the parent listed entity on the board of the unlisted material subsidiary (whose turnover or net worth exceeds 20% of the consolidated turnover or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year)
Reg 24(2): Review of financial statements of the unlisted subsidiary by the audit committee of the listed entity.Reg 24(3): Review of board minutes of the unlisted subsidiary by the board of the listed entity. Reg 24(4): Review by the board of significant transactions/arrangements entered into by the unlisted subsidiary.Reg 24 (5): Shareholders’ approval for disposal of shares of material subsidiary whose turnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity) resulting in  reduction to less than or equal to  50% or cessation of  control.Reg 24 (6): Shareholders’ approval for sale, disposal and leasing of assets of material subsidiary (whose turnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity)		Reg 62L: All requirements apply only to unlisted material subsidiary (whose income or net worth exceeds 20% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year)
CG requirement pertaining to subsidiary is relaxed for HVDLE in comparison to that of equity listed entity
Secretarial Audit and Secretarial Compliance (ASC)  ReportReg 24A: LE and its material unlisted Indian subsidiaries ((whose turnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity) to undertake Secretarial audit by Peer Reviewed Secretarial Auditor. 
Further, the regulations also deal with tenure of appointment, rotation of secretarial auditors,  eligibility, qualifications and  disqualifications for appointment of a secretarial auditor, and prohibited services prescribed w.r.t Secretarial Auditors of the listed entity. 
ASC report to be submitted within 60 days from the end of FY by the listed entity.		Reg 62M: HVDLEs and its Indian material unlisted subsidiary (no definition provided) to undertake secretarial audit and annex the report in annual report. Further, HVDLEs to submit ASC report within 60 days.
The requirement of peer reviewed CS to conduct Sec audit or issue ASC,  tenure of appointment, rotation of secretarial auditors,  eligibility, qualifications and  disqualifications for appointment of a secretarial auditor, and prohibited services prescribed w.r.t Secretarial Auditors etc not applicable. 		The amendments made in Reg. 24A vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62M.
Further, the scope of material subsidiary is not provided as the definition under Reg. 16 and Reg. 62L may not apply unless expressly indicated.











Agreement pertaining to profit sharing or in connection with dealings in securities of the companyReg 26(6): Any agreement entered into by the employees, KMP/director/promoter for himself/herself or on behalf of any other person with regard to compensation or profit sharing in connection with dealings in the securities of listed entity, requires prior approval by the board and public shareholders by way of ordinary resolution.
Interested persons involved in the transaction are required to abstain from voting.		Reg 62O(5): The regulation is similar to that provided in Reg. 26(6) with the exception that there is no restriction for voting by the interested persons.The amendments made in Reg. 26(6) vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62O.

Other Amendments

Related Party Transactions by SME Listed entities

A listed entity which has listed its specified securities on the SME Exchange are not required to comply with the CG norms otherwise applicable to a Main Board listed entity which have either paid up capital exceeding Rs. 10 crore or net worth exceeding Rs. 25 crore). In order to plug the risk of siphoning of funds to related parties, as observed by SEBI in certain instances, the present amendment harmonizes and aligns the RPT norms applicability by extending it to SME listed entities other than those which  have  paid  up  capital  not  exceeding  Rs.  10  crores  and  net  worth  not exceeding Rs. 25 crores. Further, considering the size of SMEs, the threshold limit for Material RPTs have been set to Lower of INR 50 Cr or 10% of annual consolidated turnover as per last audited financial statements. Where the provisions become applicable at a later date, SMEs will have 6 months time to ensure compliance. The provisions shall continue to apply till both the conditions w.r.t equity share capital and networth falls below the threshold and remains below the threshold for 3 consecutive FYs.

Business Responsibility and Sustainability Reporting

Regulation 34(2)(f) of the Listing Regulations so far required assurance of the BRSR Core Report, which has now been modified to term it as ‘assessment or assurance of the specified parameters’ to prevent unwarranted association with a particular profession (specifically audit profession). Assessment defined as third-party assessment undertaken as per standards notified by the Industry Standards Note on BRSR Core, developed in consultation with SEBI. 

Similar modification has been reproduced for obtaining BRSR Core Report from Value Chain Partners of the Listed Entity, and a clause of voluntary disclosure of the same for HVDLEs has been added in Regulation 62Q(3). 

Read More:

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Presentation on CG Norms for HVDLEs