Piercing through subjectivity to reach out for SBOs

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ROCs uncovering SBOs through publicly available information

– Pammy Jaiswal and Darshan Rao | corplaw@vinodkothari.com

Introduction

The framework for SBO identification can be traced back to the recommendations of the Financial Action Task Force (FATF), a global watchdog for combating money laundering and terrorist financing. Section 90 of the Companies Act, 2013 (‘Act’) read with its Rules translates the recommendations into provisions for enforcing the concept, with two broad manners of identification methods. The first being the objective test where the shareholding is picked up through the layers to see the type of entity and the extent of holding to identify the SBO for the reporting entity. The second is the subjective test where the aspects of control and significant influence are evaluated from all possible corners to reach the SBO. It is generally seen that the objective test is the most common way for SBO identification, however, in most of the cases where the regulator has made the identification, it has held the hands of subjectivity.  As a follow-up to the LinkedIn case[1], we have discussed a few other rulings where the RoC has taken diverse ways under the subjectivity armour to reach out to the SBOs. The article also explains the principles of law that emerge from every case law, giving a broader angle to the readers on the ever evolving corporate governance norms in the context of SBO identification.

Some of the aspects via which SBOs have been identified in the rulings discussed in this article are as follows:

  • Control over the Board of the listed overseas parent
  • CEO in relation to and not only of the Pooled Investment Vehicle
  • Financial dependence and control established via usage of common domain name
  • Erstwhile promoters obligation to disclose where the new promoters are exempt for the then time period

We have discussed these in detail in the following paragraphs to inform the way RoCs went on a spree to unearthen the SBOs taking shields of the language of the existing legal provisions around SBO identification.

Subjectivity facets for SBO identification

As discussed above, the two broad subjective tests for SBO identification are right to exercise or the actual exercising of significant influence or control over the reporting entity. It is imperative note the relevance of stating both the situations as a potential to become SBO for the reporting, being:

  • Right to exercise significant influence or control [note here that actual exercise is not a prerequisite]; or
  • Actual exercising of significant influence or control.

Further, it is pertinent to note that ‘control’ has been defined under Section 2(27) of the Act to “include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.

Again, the term ‘significant influence’ has been defined under Rule 2(1)(i) of the SBO Rulesas the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.

In the following parts of the article, we will be able to know, the manner in which these aspects have been investigated to reach out for the SBOs.

A.   Examining cross holdings, chairmanship and other publicly available data[2] 

The Indian reporting entity was a WoS of an overseas listed entity which was a large conglomerate and hence there were several cross holdings in the entities in the top level. There was no declaration of SBO in the given case on account of the argument given that the holding entity is a listed company and hence, there is no individual holding control or significant influence over the said parent. Enquiry was made about the details of the promoters, directors, KMP and shareholders of certain promoter entities as well as chairperson of board meetings and UBO for the reporting company.

Further, upon investigation into the public records of the holding entity, it was found that one particular individual from the promoter category along with his family holds approx 21.46% in the ultimate parent entity and that his son significant stake in two other promoter group entities which in turn holds in the ultimate parent entity of the reporting company.

RoC concluded that the son along with his family members, directly and indirectly exercises significant influence in the ultimate parent. Further, the same person also holds the position of a chairperson in the said entity when the said company already has a full-fledged chairperson already indicating a situation of proxy control through legally remote mechanism. Accordingly, he should have been declared as SBO for the reporting company in India. The snapshot of holding is given below:

B.   Individual manager/ CEO related to Pooled Investment Vehicle and not necessarily of the Investment Vehicle[3]

In cases where the SBO is identified via the members holding the reporting company and the ultimate shareholder as such is a pooled investment vehicle, in that case even if there is no individual as a general partner or the investment manager or the CEO of such vehicle, then any individual in relation to the pooled investment vehicle and not necessarily of such a vehicle can be regarded as an SBO. In this case the CEO of the investment manager was considered as an SBO since he was the one responsible for the decision making of such investment manager and hence, relevant for investment decisions of the vehicle.

While arriving at the conclusion of this ruling, RoC clearly indicated that the legislative scheme of Section 90 ensures that at the end of every ownership chain, a natural person(s) must be identifiable as the SBO. Companies cannot rely on the complexity of foreign fund structures or the absence of direct nominees to evade compliance; the obligation to investigate and file BEN forms lies squarely on the Indian company. The ROC implicitly aligned Indian law with FATF Recommendations 24 and 25[4], emphasizing that beneficial-ownership disclosure extends through investment vehicles, LLPs, and trusts

C.   Financial / Business Dependency, Usage of common domain name, KMPs of foreign parent employed in Indian reporting company[5]

In a very interesting case where 100% of the shares were only held by a few individuals, RoC concluded that even in such entities identification of SBO is still possible on account of assessment of several factors. These include the reporting test as well as financial control test. In such cases, one may consider evaluating the business dependency in terms of supply to or from the reporting entity, other clues like entities with a common domain name, similarity in trademark, procurement policies.

In this case it was investigated and consequently observed that the shareholder of the reporting company held a controlling stake in the overseas supplier entities on which the reporting company had the highest dependency. Further, the RoC also found out that both the reporting company and these supplier entities had applied for a similar trademark. Further, these entities were reported to be under the common control of an individual who happens to be the director as well the majority shareholder of the reporting company. It is also imperative to note that one of the director-cum senior employees and another senior employee are the ones who have been shown as the supervisor and UBO for the overseas supplier entities.

In this ruling, RoC also referred to the FATF Guidance[6] on control in cases with no shareholding. It includes the following means:

  • Control through positions held within a legal person: Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances. Depending on the legal person and the country’s laws, directors may or may not take an active role in exercising control over the affairs of the entity.
  • Control through informal means: Furthermore, control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. Further, when an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.

D.   Current exemption gets overruled by past obligation to declare[7]

ROC held clearly in this case that the current holding structure even though exempt from the disclosure requirements pursuant to Rule 8 of the SBO Rules, the same will still be subject to penal actions where the declaration was not made as and when applicable in the period prior to qualifying for such exemption.

Concluding Remarks

On perusal of each of these rulings, it becomes clear that no matter how complicated or how simple the corporate structure is, the regulators will leave no stone unturned while carrying on their investigation for finding the real SBOs. Regulators have the determination to uncover SBOs who exercise control behind every legal entity.

A few measures that can be adopted include establishing robust frameworks to continuously track changes in shareholding and control arrangements, maintaining detailed documentation of every ownership and control analysis conducted and filing all SBO disclosures promptly with the Registrar of Companies (RoC). It is also imperative that suitable amendments are made to define the ‘ultimate beneficial owner’ (UBO) rather than the ‘significant beneficial owner’. To some extent, this can be helpful to those corporations with several layers of entities to identify the UBO, although the process would lose its viability considering the scale and extent of tracing.

However, the concern that remains is that the exercise to trace the origins of relationship may prove to be an onus on entities apart from the penal consequences it carries in case of non-compliance.

[1] Read our analysis here

[2] In the matter of Samsung Display Noida Private Limited

[3] In the matter of Leixir Resources Private Limited

[4]FATF Beneficial Ownership of Legal Persons

[5] In the matter of Metec Electronics Private Limited

[6] FATF Beneficial Ownership of Legal Persons

[7] In the matter of Shree Digvijay Cement Ltd

Resource Centre on SBOs

Control based SBO identification beyond the current legislation

RBI’s Corporate Governance Blueprint Aims at Reshaping Bank Boards

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– Team Corplaw | corplaw@vinodkothari.com

As a part of the RBI’s recent consolidation exercise, RBI has released Draft Reserve Bank of India (Commercial Banks – Governance) Directions, 2025. This exercise integrates decades of existing circulars into a streamlined framework, enhancing clarity and ease of governance. While primarily a consolidation, the RBI has undertaken extensive clause shifting, reorganisation, and pruning of redundancies to improve accessibility. Further, new provisions have been introduced for Private Sector Banks (PVBs) in line with the Discussion paper on Governance in Commercial Banks in India dated 11th June, 2020 or in alignment with the provisions applicable to Public Sector Banks (PSBs). Below are some of the key highlights from this consolidated framework for PVBs:

1.     Additional disqualifications for Fit and Proper Criteria

The Draft Directions specify additional disqualification conditions for a person proposed to be appointed as a director in a PVB. These include:

  1. Common directorship with a Non-Banking Financial Institution (NBFI) or
  2. Association of the proposed candidate with such institutions in any other capacity.

The institutions engaged in the following activities are covered by the said restriction:

  •  finance,
  • investment,
  • money lending,
  • hire purchase,
  • leasing,
  • chit / kuri business,
  • Mutual funds,
  • Asset Management Companies and
  • other para-banking companies.

The term “NBFI” has not been used in the Draft Directions, however, taken from the 2020 Discussion Paper. The 2020 Discussion Paper permitted common directorship with NBFIs subject to certain conditions, and defined NBFI as:

Non-banking financial institutions (NBFI) are entities engaged in hire purchase, financing, investment, leasing, money lending, chit/kuri business and other para banking activities such as factoring, primary dealership, underwriting, mutual fund, insurance, pension fund management, investment advisory, portfolio management services, agency business etc.)

The meaning of para banking activities may also be taken from Master Circular on para banking activities.

Under the Draft Directions, the scope of restrictions are as follows:

Point (a) pertaining to common directorships prohibit common directorship with NBFIs, except in case of NBFCs. For NBFCs, the permission with respect to having common directors have been retained, with the conditions as specified in the Part C (ii) of Report of the Consultative Group of Directors of Banks / Financial Institutions (Dr. Ganguly Group) – Implementation of recommendations dated 20th June, 2002.

The scope of restriction under point (b) is wider, and covers association “in any other capacity”. However, directorship is permitted in such cases, subject to compliance with certain conditions, viz.,

  • The institution does not enjoy any financial accommodations from the concerned PVB;
  • Person does not hold whole time appointment in the institution; and
  • The person does not have substantial interest’ in the institution as defined in Section 5(ne) of the Banking Regulation Act, 1949.

Note that the meaning of “institution” itself is vast, and covers, incorporated and unincorporated entities including individuals.

The proposed inclusion is also in partial alignment with the condition specified in fit and proper criteria for PSBs that states:

A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities shall not be considered for appointment as elected director.

2.     Clarity w.r.t. the role of Board, EDs and NEDs

The 2020 Discussion Paper had elaborate discussion on the role of the board of the banks, primarily drawing reference from the Basel Committee on Banking Supervision Guidelines of 2015, in addition to the existing requirements specified through various circulars.

The Draft Directions further sets out the expectations from the MD/ CEO/ WTDs vis-a-vis NEDs, alongside the role of board.

Para 51 and 52 of the Draft Directions specifies role of the board, which includes:

  • Conduct affairs in a solvent, adequately liquid and reasonably profitable manner
  • Ensure that the Memorandum and the Articles of Association spell out the duties, functions and obligations of the directors towards the PVB
  • Institutionalise discussions between its management and the Board on quality of internal control systems
  • Set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization.

For NEDs, Para 52 & 53 of the Draft Directions sets out the expectations from the NEDs, including areas that NEDs should pay particular attention to. Para 54 further provides various positive and negative stipulations, some of which are stated below:

Negative stipulationsPositive stipulations
  • not be an employee of the PVB.
  • have no power to act on behalf of the PVB
  • nor can they give any direction to the employees of the PVB on behalf of the management.
  • desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO / CEO of the PVB.
  • exercise power only as a member of a collective body, unless specifically authorised by a Board resolution,
  • not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent.
  • not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters.
  • act with ordinary person’s care and prudence
  • disclose the nature of interest to Board wherever directly or indirectly interested or concerned in any contract, loan, arrangement or proposal entered/ proposed to be entered and not to vote on any such proposal [similar to sec. 184 of CA]

As regards CEO & MD/ CEO/ WTDs, Para 56 of the Draft Directions state that they should act as a bridge between the board and management. They are charged with the responsibility of efficient management of the bank on behalf of the Board. It is through them that the programmes, policies and decisions approved by the Board are made effective and again it is through them that the Board gets the responses and reactions of those at various levels of the organisations to its deliberations.

A mapping of the various provisions of the Draft Directions as applicable to PVBs vis-a-vis the existing applicable circular setting out such requirements can be accessed here.

 

Demystifying Structured Debt Securities: Beyond Plain Vanilla Bonds

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Palak Jaiswani, Manager | corplaw@vinodkothari.com

Debentures, one of the most common means for raising debt funding, where investors lend money to the issuer in return for periodic interest and repayment of principal at maturity. While the basic feature of any debenture is a fixed coupon rate and a defined tenure (commonly referred to as plain vanilla instruments), sometimes these instruments may be topped up with enhanced features such as additional credit support, market-linked returns, convertibility option, etc., thus referred to as structured debt securities.

Structured debt securities: motivation for issuers

Apart from the economic favouring such structural modifications, a primary motivation for the issuer in issuing such structured instruments might be the regulatory advantages that these securities offer. For instance,

  • Chapter VIII of SEBI NCS Master Circular provides an extra limit of 5 ISINs for structured debt securities & market-linked securities, thus more room for the issuers to issue debt securities, compared to the restriction of a maximum of 9 ISINs for plain vanilla debt.
  • In addition, as per NSE Guidelines on Electronic Book Provider (EBP) mechanism, market-linked debentures are not required to be routed through EBP, allowing issuers to place such instruments almost like an over-the-counter trade. This allows issuers to structure the debt securities on a tailored basis and offer them directly to specific investors.
Read more →

Insider Trading Safeguards: Sensitising Fiduciaries

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– Team Corplaw | Corplaw@vinodkothari.com

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SEBI says SWAGAT to investors

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– Team Corplaw | corplaw@vinodkothari.com

– Approves major proposals easing institutional investments in IPOs, minimum offer size for larger entities, AIF entry, increased threshold for related party transaction approvals etc.

Relaxed norms for Related Party Transactions 

  • Introduction of scale-based threshold for materiality of RPTs for shareholders’ approvals based on annual consolidated turnover of the listed entity
Annual Consolidated Turnover of listed entity (in Crores)Approved threshold (as a % of consolidated turnover)
< Rs.20,00010%
20,001 – 40,0002,000 Crs + 5% above Rs. 20,000 Crs
> 40,0003,000 Crs + 2.5% above Rs. 40,000 Crs
  • Revised thresholds for significant RPTs of subsidiaries
    • 10% of standalone t/o or material RPT limit, whichever is lower.
  • Simpler disclosure to be prescribed by SEBI for RPTs that does not exceed 1% of annual consolidated turnover of the listed entity or Rs. 10 Crore, whichever is lower. ISN disclosures will not apply.
  • ‘Retail purchases’ exclusions extended to relatives of directors and KMPs, subject to existing conditions 
  •  Inclusion of validity of shareholders’ approval as prescribed in SEBI circular dated 30th March 2022 and 8th April, 2022 
  • Rationale (See Consultation Paper)

Relaxation in thresholds for Minimum Public Offer (MPO) and timelines for compliance Minimum Public Shareholding (MPS) for large issuers (issue size of 50,000 Cr and above)

  • Reduction in MPO requirements for companies with higher market capitalisation 
  • Relaxed timelines for complying with MPS
  • Post listing, the stock exchanges shall continue to monitor these issuers through their surveillance mechanism and related measures to ensure orderly functioning of trading in shares 
  • Applicable to both entities proposed to be listed and existing listed entities that are yet to comply with MPS requirements 
  • Following changes recommended in Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957: 
Post-issue market capitalisation (MCap) MPO requirements Timeline to meet MPS requirements (25%)
Existing provisions Post amendmentsExisting provisions Post amendments
≤ 1,600 Cr25%NA
1,600 Cr < MCap ≤ 4,000 Cr400 Crs  Within 3 years from listing
4,000 Cr < MCap ≤ 50,000 Cr10%Within 3 years from listing
50,000 Cr < MCap ≤ 1,00,000 Cr10%1,000 Cr and at least 8% of post issue  capitalWithin 3 years from listingWithin 5 years from listing
1,00,000 Cr < MCap ≤ 5,00,000 Cr5000 Cr and  atleast 5% of post issue  capital 6, 250 Cr and 2.75% of post issue  capital10% – within 2 years 25% – within 5 yearsIf MPS on the date of listing <15%, then15% – within 5 yrs25% – within 10 yrs
If MPS >15% on the date of listing, 25% within 5 yrs
MCap > 5,00,000 Cr15,000 Cr and 1%of post issue  capital, subject to minimum dilution of 2.5%If MPS on the date of listing <15%, then15% – within 5 yrs25% – within 10 yrs
If MPS on the date of listing  >15%, 25% within 5 yrs
  • Rationale (see Consultation Paper):
    • Mandatory equity dilution for meeting MPS requirement may lead to an oversupply of shares in case of large issues; 
    • Dilution may impact the share prices despite strong company fundamentals. 

Broaden participation of institutional investors in IPO through rejig in the anchor investors allocation

  • Following changes recommended in Schedule XIII of ICDR Regulations.
    • Merge Cat I and II of Anchor Investor Allocation to a single category of upto 250 crores. Minimum 5 and maximum 15 investors subject to a minimum allotment of ₹5 crore per investor.
    • Increasing   the   number   of   permissible  Anchor Investor allottees for allocation above 250 crore in the discretionary allotment –  for every additional ₹250 crore or part thereof, an additional 15 investors (instead of 10 as per erstwhile norms) may be permitted, subject to a minimum allotment of ₹5 crore per investor. 
    • Life insurance companies and pension funds included in the reserved category along with domestic MF; proportion increased from 1/3rd (33.33%) to 40%
      • 33% for domestic MFs
      • 7% for life insurance companies and pension funds
        • In case of undersubscription, the unsubscribed part will be available for allocation to domestic MF.
  • Rationale (See Consultation Paper)
    • Increase in permitted investors:
      • To ease participation  for  large  FPIs  operating  multiple  funds with  distinct  PANs,  which  currently  face  allocation  limits  due  to  line  caps
      • Given the recent deal size, most  issuances  fall  within  the  threshold  of Cat II  or  higher, limiting the relevance of Cat 1, therefore merge Cat 1 and Cat II
    • Including life insurance companies and pension funds:
      • Growing interest in IPOs, the amendment will ensure participation and diversify long term investor base.

Clarifications in relation to manner of sending annual reports for entities having listed non-convertible securities [Reg 58 of LODR]

  • For NCS holders whose email IDs are not registered
    • A letter containing a web link and optionally a static QR code to access the annual report to be sent
      • Instead of sending hard copy of salient features of the documents as per sec 136 of the Act 
      • Aligned with Reg 36(1) (b) of LODR as applicable to equity listed cos
      • Currently, temporary relaxation was given by SEBI from sending of hard copy of documents, provided a web-link  to  the  statement  containing  the  salient  features  of  all  the documents is advertised by the NCS listed entity 
  • Timeline for sending the annual report to NCS holders, stock exchange and debenture trustee
    • To be specified based on the law under which such NCS-listed entity is constituted 
    • For e.g. – Section 136 of the Companies Act specifies a time period of at least 21 days before the AGM.

Light touch regulations for AIFs that are exclusively for Accredited Investors and Large Value Funds

  • Introduction of new category of AIFs having only Accredited Investors 
  • Reduction of minimum investment requirements for Large Value Funds (LVFs) from Rs. 70 crores to Rs. 25 crores per investor 
  • Lighter regulatory framework for AIs – only/ LVFs 
  • Existing eligible AIFs may also opt for AI only/ LVF classification with associated benefits
  • Rationale: see Consultation Paper 

Read detailed article: Proposed Exclusivity Club: Light-touch regulations for AIFs with accredited investors

Facilitating investments in REITs and InVITs

  • Enhanced participation of Mutual Funds through re-classification of investment in REITs as ‘equity’ investments, InVITs to continue ‘hybrid’ classification
    • Results in REITs becoming eligible for limits relating to equity and equity indices 
    • Entire limits earlier available to REITs and InVITs taken together now becomes available to InVITs only
  • Rationale (see Consultation Paper)
    • In view of the characteristics of REIT & InVITts and to align with global practice
  • Expanding the scope of ‘Strategic Investor” & aligning with QIBs under ICDR
    • Extant Regulations cover: NBFC-IFCs, SCB, a multilateral and bilateral development financial institution, NBFC-ML & UL, FPIs, Insurance Cos. and MFs.
    • Scope amended to include: QIBs, Provident & Pension funds (Min Corpus > 25Cr), AIFs, State Industrial Development Corporation, family trust (NW > 500 Cr) and intermediaries registered with SEBI (NW > 500 Cr) and NBFCs – ML, UL & TL
    • Relevance of Strategic Investors: 
      • Invests a min 5% of the issue size of REITs or INVITs subject to a maximum of 25%. Investments are locked in for a period of 180 days from listing
      • Such subscription is documented before the issue and disclosed in offer documents
    • Rationale: see Consultation Paper
      • to attract capital from more investors under the Strategic Investor category
      • to instil confidence in the public issue

SWAGAT-FI for FPIs: relaxing eligibility norms, registration and compliance requirements

  • Registration of retail schemes in IFSCs as FPIs alongside AIFs in IFSC
    • Both for retail schemes and AIFs, the sponsor / manager should be resident Indian
  • Alignment of contribution limit by resident indian non-individual sponsors with IFSCA Regs
    • Sponsor contributions shall now be subject to a maximum of 10% of corpus of the Fund (or AUM, in case of retail schemes)
  • Overseas MFs registering as FPIs may include Indian MFs as constituents
    • SEBI circular Nov 4, 2024 permitted Indian MFs to invest in overseas MFs/UTs that have exposure to Indian securities, subject to specified conditions
  • SWAGAT for objectively identified and verifiably low-risk FIs and FVCIs
    • Introduction of SWAGAT-FI status for eligible foreign investors
      • Easier investment assess
      • Unified registration process across multiple investment routes
      • Minimize repeated compliance requirements and documentation
    • Eligible entities (applicable to both initial registration and existing FPIs):
      • Govt and Govt related investors: central banks, SWFs, international / multilateral organizations / agencies and entities controlled or 75% owned (directly or indirectly) thereby
      • Public Retail Funds (PRFs) regulated in home jurisdiction with diversified investors and investments, managed independently: MFs and UTs (open to retail investors, operating as blind pools with diversified investments), insurance companies (investing proprietary funds without segregated portfolios), PFs
    • Relaxation for SWAGAT-FIs
    • Option to use a single demat account for holding all securities acquired as FPI, FVCI, or foreign investor units, with systems in place to ensure proper tagging and identification across channels

India Market Access – dedicated platform for current and prospective FPIs

To tackle the problem of global investors in accessing Indian laws and regulatory procedures across various platforms, citing the absence of a centralized and comprehensive legal repository.

Read More:

Relaxed Party Time?: RPT regime gets lot softer

LODR Resource Centre

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.

Read More:

Diktat of demat for private companies 

FAQs on mandatory demat of securities by private companies

12 hours Certificate Course on Nuts and Bolts of Related Party Transactions

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Repetitive Overhaul: RPT regime to get softer

Related Party Transactions- Resource Centre

FAQs on Standards for minimum information to be disclosed for RPT approval

Repetitive Overhaul: RPT regime to get softer

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– Team Corplaw | corplaw@vinodkothari.com

SEBI rolls out Consultation Paper: Materiality threshold for RPTs to be scale-based, Industry Standard to get softer, de minimis exemptions

Since 2021, the RPT framework for listed entities has been witnessing repetitive changes, and the current year 2025 has seen SEBI on a regulatory fast track in relation to RPTs.  Be it the launch of RPT Analysis Portal, offering unprecedented visibility into RPT governance data, or the Industry Standards Note (‘ISN’), requiring seemingly a pile of information w.r.t RPTs, both in the month of February, 2025. Originally scheduled to be effective from FY 25, the applicability of ISN was later pushed on to July 1, 2025, and while on the verge of becoming effective, on June 26, 2025, SEBI notified Revised RPT Industry Standards, prescribing tiered but somewhat simplified disclosure formats effective September 1, 2025.

Even before the ISN could become effective, a 32-pager consultation paper proposing further amendments to RPT provisions has been rolled out by SEBI on August 4, 2025.

Based on the “Ease of Doing Business” theme, the Consultation Paper proposes  amendments in the RPT framework, based on recommendations from the Advisory Committee on Listing Obligations and Disclosures (ACLOD). The proposals aim to address practical challenges faced by listed entities while maintaining robust governance standards.

Below we present the proposed amendments and our analysis of the same.

1. Materiality Thresholds: From One-Size-Fits-All to several sizes for short-and-tall

Proposal in CP

A scale-based threshold mechanism is proposed through a new Schedule XII to LODR Regulations, such that the RPT materiality threshold increases with the increase in the turnover of the company, though at a reduced rate, thus leading to an appropriate number of RPTs being categorized as material, thereby reducing the compliance burden of listed entities. The maximum upper ceiling of materiality has been kept at Rs. 5,000 crores, as against the existing absolute threshold of Rs. 1000 crores.

Proposed materiality thresholds:

Annual Consolidated Turnover of listed entity (in Crores)Proposed threshold (as a % of consolidated turnover)Maximum upper ceiling (in Crores)
< Rs.20,00010%2,000
20,001 – 40,0002,000 Crs + 5% above Rs. 20,000 Crs3,000
> 40,0003,000 Crs + 2.5% above Rs. 40,000 Crs5,000 (as proposed)

Back-testing the proposal scale on RPTs undertaken by top 100 NSE companies show a 60% reduction in material RPT approvals for FY 2023-24 and 2024-25 with total no. of such resolutions reducing from 235 and 293, to around 95 to 119. The 60% reduction may itself be seen as a bold admission that the present framework is causing too many proposals to go for shareholder approval.

Historical Benchmark

The absolute threshold of Rs. 1000 crores, for determination of RPTs as material was brought pursuant to an amendment in November 2021, following the recommendations of the Working Group on RPTs. The proposal of WG was based on the data between the years 2015 to 2019, which showed that only around 70 to 91 resolutions were placed for material RPT approvals by the top 500 listed entities.

Our Analysis and Comments

  • Turnover as a single metric is not a measure of materiality: Scale-based tests align materiality with turnover, introducing proportionality, but the question remains whether turnover itself is at all an appropriate yardstick to measure materiality.

Turnover is an inadequate metric for determining the materiality of RPTs. Materiality should reflect the likely financial impact of a transaction, which may have little or no correlation with turnover. For instance, transactions involving investments, asset acquisitions or disposals, or borrowings pertain to the balance sheet rather than the revenue-generating side of operations. Even if an item pertains to revenues, there are businesses where gross profits ratios are low, and therefore, turnover will be high. Globally, jurisdictions like the UK adopt a more nuanced, consonance-based approach [Refer Annex 1 of UKLR 7] using different parameters viz. gross assets test, consideration test, and the gross capital test for different transaction types to ensure relevance and proportionality. Section 188 of the Companies Act, 2013 also adopts a similar multi-metric approach, applying turnover and net worth, depending on the nature of the transaction.

It is also critical to recognise the wide disparity in asset-turnover ratio across industries. A trading company might turn its assets over 20 times annually, while a manufacturing entity with a 90-day working capital cycle may show a turnover approximately four times its assets. On the other hand, entities in the financial sector, such as NBFCs and banks, generate turnover largely through interest income, which is barely 6 to 10 percent of the asset base. Therefore, applying a turnover-based threshold to such entities results in thresholds being disproportionately low when compared to the actual scale of transactions, thereby distorting the materiality assessment.

Given these sectoral variations and the diversity of transaction types, a flat turnover-based threshold oversimplifies the assessment and may result in both overregulation and underreporting. A more calibrated, transaction-specific materiality framework, drawing on consonance-based criteria as seen in Regulation 30 of the LODR Regulations, would offer a more balanced and effective approach. SEBI may consider moving towards such a harmonised model to ensure that materiality thresholds meaningfully reflect the substance of transactions, rather than relying on a single yardstick.

  • Regulatory Lag: It took SEBI almost 4 years, i.e., from 2021 to 2025, to conclude that the threshold of ₹1,000 crores is too small, and that it requires an upward revision, which is now proposed to be increased to ₹5,000 crores. In the context of India’s rapidly growing economy, where turnover figures are expected to rise steadily, even this upwardly revised absolute threshold may soon lose relevance. Frequent threshold shifts risk “chasing” market realities rather than anticipating them. SEBI’s decision to cap at ₹5,000 crore reflects caution but may quickly become outdated.

2. Significant RPTs of Subsidiaries: Plugging Gaps with Dual Thresholds

Existing provisions vis-a-vis Proposal in CP

Pursuant to the amendments in 2021, RPTs exceeding a threshold of 10% of the standalone turnover of the subsidiary are considered as Significant RPTs, thus, requiring approval of the Audit Committee of the listed entity. The CP proposes the following modifications with respect to the thresholds of Significant RPTs of Subsidiaries:

  • ‘Material’ is always ‘Significant’: There may be instances where a transaction by a subsidiary may trigger the materiality threshold for shareholder approval, based on the consolidated turnover of the listed entity, but still fall below the 10% threshold of the subsidiary’s own standalone turnover. As a result, such a transaction would escape the scrutiny of the listed entity’s audit committee. This inconsistency highlights a regulatory gap and reinforces the need to revisit and revise the threshold criteria to ensure comprehensive oversight in a way that aligns with evolving group structures and scale of operations. RPTs of subsidiary would require listed holding company’s audit committee approval if they breach the lower of following limits:
  • 10% of the standalone turnover of the subsidiary or
    • Material RPT thresholds as applicable to listed holding company
  • Exemption for small value RPTs: The threshold for Significant RPTs is subject to an exemption for small value RPTs based on the absolute value of Rs. 1 crore. Thus, where a transaction between a subsidiary and a related party (of the listed entity/ subsidiary), on an aggregate, does not exceed Rs. 1 crore, the same is not required to be placed for approval of the Audit Committee of the listed entity, even if the aforesaid limits are breached.
  • Net Worth Alternative: For newly incorporated subsidiaries which are <1 year old, consequently not having audited financial statements for a period of at least one year, the threshold for Significant RPTs to be determined as below:
  • 10% of standalone net worth of the subsidiary (or share capital + securities premium, if negative net worth),
    • as on a date not more than 3 months prior to seeking AC’s approval
    • certified by a practising CA

Our Analysis and Comments

●      De-minimis exemption for significant RPTs of subsidiaries

The exemption for RPTs up to Rs. 1 crore in absolute terms might provide some relief for the holding entities, particularly, entities having various small subsidiaries, which, on a standalone basis, may not be material for the listed entity at all – however, the RPTs being significant at the subsidiary’s level still required approval of the parent’s audit committee. However, still the exemption threshold may be further enhanced to a higher limit, as a de minimis exemption of Rs. 1 crore entails the subsidiary having a turnover of mere Rs. 10 crores, which, from the perspective of a listed entity is a not a very practically beneficial scenario.

For newly incorporated companies not having a financial track record, linking the significant RPT threshold with net worth brings additional compliance burden in the form of certification requirements from PCA. Net worth alternative introduces valuation and certification burdens for newly incorporated entities, in which case It may be considerable to extend a blanket first year exemption of upto Rs. 5 crore, to balance ease of doing business for newly incorporated subsidiaries, the very decision of which would be stemming from the management of the parent listed entity. In fact, insisting on the net worth certificate itself seems unnecessary, as the net worth is mostly based on paid up capital, which does not warrant certification.

●      Need for easing inclusion of RPs of subsidiaries as RPs of listed entity

First of all, a statement of fact. The number of related parties of listed entities went for a significant explosion in November, 2021, where the definition of RP of a listed entity included RPs of subsidiaries. For any diversified group, there are typically several subsidiaries, each of them with their own independent boards.

While the proposals pertain to significant RPTs of subsidiaries, the most crucial component of the RPT framework lies in identification of RPs, which, under the current framework, covers RPs of subsidiaries as well. These RPs may be, many a times, companies in which the directors of the subsidiaries are holding mere directorships, often, an independent directorship. There is absolutely no scope of conflict of interests in dealing with companies where a person is interested, solely on account of his directorship where there is no direct or indirect shareholding or ownership interest. Such a situation has an explicit carve out under the Ind AS 24 as well, where an entity does not become a RP by the mere reason of having a common director or KMP [Para 11(a) of Ind AS 24]. While the Companies Act treats a company as an RP based on common directorship (in case of a private company), however, the extension of such definition to RPs of subsidiaries is pursuant to the provisions of SEBI LODR and hence, appropriate exclusions may be specified for under LODR.

3. Tiered Disclosures: Balancing Transparency and Burden

Existing provisions vis-a-vis Proposal in CP

The Industry Standards Note on RPTs, effective from 1st September, 2025 provides an exemption from disclosures as per ISN for RPTs aggregating to Rs. 1 crore in a FY. The proposal seeks to provide further relief from the ISN, by introducing a new slab for small-value RPTs aggregating to lower of:

  • 1% of annual consolidated turnover of the listed entity as per the last audited financial statements, or
  • Rs. 10 crore

In such cases, the disclosures are proposed to be given in the Annexure-2 of the Consultation Paper. The disclosure as per the Annexure is in line with the minimum information as is currently required to be placed by the listed entity before its Audit Committee in terms of SEBI Circular dated 22nd November, 2021 (currently subsumed in LODR Master Circular dated November 11, 2024). In the event of the same becoming effective, disclosures would be required in the following manner as per LODR:

Value of transactionDisclosure RequirementsApplicability of ISN
< Rs. 1 croreReg 23(3) of SEBI LODRNA – exempt as per ISN
> Rs 1 crore, but less than 1% of consolidated turnover of listed entity or Rs. 10 crores, whichever is lower (‘Moderate Value RPTs’)Annexure-2 of CP (Paragraph  4  under  Part  A  of  Section  III-B of SEBI Master Circular dated November 11, 2024)Proposed to be exempt from ISN
Other than Moderate Value RPTs but less than Material RPTs (specified transactions)Part A and B of ISNYes
Material RPTs (specified transactions are material)Part A, B and C of ISNYes
Other than Moderate Value RPTs but less than Material RPTs (other than specified transactions)Part A of ISNYes

 Our Analysis and Comments

The proposal would result in creation of multiple reference points with respect to disclosure requirements. As per the existing regulatory requirements, the disclosure requirements before the Audit Committee comes from the following sources:

  • Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 – for listed entities incorporated as a company
  • Reg 23(3)(c) of SEBI LODR – for omnibus approvals
  • SEBI Circular dated 26th June, 2025 read with Industry Standards Note on RPTs – effective from 1st September 2025, for all RPTs other than exempted RPTs (aggregate value of upto Rs. 1 crore)

The proposal leads to an additional classification of RPTs into moderate value RPTs where limited disclosures in terms of the draft Circular will be applicable. While the introduction of differentiated disclosure thresholds aims to rationalise compliance, care must be taken to ensure that the disclosure framework does not become overly template-driven. RPTs, by nature, require contextual judgment, and a uniform disclosure format may not always capture the nuances of each case. It is therefore important that the regulatory design continues to place trust in the informed discretion of the Audit Committee, allowing it the flexibility to seek additional information where necessary, beyond the prescribed formats.

4. Clarification w.r.t. validity of shareholders’ Omnibus Approval

Existing provisions vis-a-vis Proposal in CP

The existing provisions [Para (C)11 of Section III-B of LODR Master Circular] permit the validity of the omnibus approval by shareholders for material RPTs as:

  • From AGM to AGM – in case approval is obtained in an AGM
  • One year – in case approval is obtained in any other general meeting/ postal ballot

A clarification is proposed to be incorporated that the AGM to AGM approval will be valid for a period of not more than 15 months, in alignment with the maximum timeline for calling AGM as per section 96 of the Companies Act.

Further, the provisions, currently a part of the LODR Master Circular, are proposed to be embedded as a part of Reg 23(4) of LODR.

5. Exemptions & Definitions: Pruning Redundancies

Problem Statement

Proviso (e) to Regulation 2(1)(zc) of the SEBI LODR Regulations exempts transactions involving retail purchases by employees from being classified as Related Party Transactions (RPTs), even though employees are not technically classified as related parties. Conversely, it includes transactions involving the relatives of directors and Key Managerial Personnel (KMPs) within its ambit. Additionally, Regulation 23(5)(b) provides an exemption from audit committee and shareholder approvals for transactions between a holding company and its wholly owned subsidiary. However, the term “holding company” used in this context has remained undefined, leaving ambiguity as to whether it refers only to a listed holding company or includes unlisted ones as well.

Proposal in CP

The Consultation Paper proposes two key clarifications:

  1. The exemption related to retail transactions should be expressly limited to related parties (i.e., directors, KMPs, or their relatives) to grant the appropriate exemption.
  2. The exemption for transactions with wholly owned subsidiaries should apply only where the holding company is also a listed entity, thereby excluding unlisted holding structures from this relaxation

Our Analysis and Comments

Under the existing framework, retail purchases made on the same terms as applicable to all employees are exempt when undertaken by employees, but not when made by relatives of directors or KMPs. This has led to an inconsistent treatment, where similarly situated individuals receive different regulatory treatment solely on the basis of their relationship with the company. The proposed language attempts to streamline this by including such relatives within the exemption, but it introduces its own drafting concern.

  • The phrasing – “retail purchases from any listed entity or its subsidiary by its directors or its employees key managerial personnel(s) or their relatives, without establishing a business relationship and at the terms which are uniformly applicable/offered to all employees and directors and key managerial personnel(s)” – creates a potential loophole. As worded, the exemption could be interpreted to cover purchases made on favourable terms offered to directors or KMPs themselves, rather than being benchmarked against terms applicable to employees at large. The intended spirit of the provision seems to be to exempt only those transactions where the terms are genuinely uniform and non-preferential. A more appropriate construction would make it clear that the exemption is intended to apply only where such transactions mirror employee-level retail transactions, not privileged arrangements for senior management.
  • Regarding the exemption under Regulation 23(5)(b) for transactions between a holding company and its wholly owned subsidiary, this clarification seeks to align the treatment under Regulations 23(5)(b) and 23(5)(c). While this provides helpful interpretational guidance, incorporating the word “listed” directly into the text of the Regulation itself could offer greater precision and eliminate the need for retrospective explanations. Since unlisted holding companies are not subject to LODR, they are unlikely to have interpreted the exemption as applicable in the first place. As such, a simple prospective clarification might serve the purpose more effectively.

Conclusion

SEBI’s August 2025 proposals are largely aimed at relaxation, though in some cases, the ability to think beyond the existing track of the law seems missing. With the new leadership at SEBI meant to rationalise regulations, it was quite an appropriate occasion to do so. However, at many places, the August 2025 proposals are simply making tinkering changes in 2021 amendments and fine-tuning the June 2025 ISN. In sum, SEBI’s iterative approach to RPT governance demonstrates commendable responsiveness but calls for a holistic RPT policy road-map, harmonizing LODR regulations, circulars, and guidelines. Only a forward-looking, principles-based framework, will deliver the twin objectives of ease of doing business and investor protection in the long run.

Read More:

FAQs on Standards for minimum information to be disclosed for RPT approval

Tailored to Fit Practically: Disclosure for RPTs under Revised Industry Standards

Related Party Transactions- Resource Centre

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. ↩︎

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