NFRA Circular on effective communication between auditors and TCWG – Frequently Asked Questions

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Team Corplaw | corplaw@vinodkothari.com

FAQs on NFRA (1)Download

Other resources:

NFRA’s Call for a Two-Way Communication: A New Requirement or a Gentle Reminder?

External Commercial Borrowings (ECB) Framework

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– Heta Mehta, Senior Executive | corplaw@vinodkothari.com

Watch our video here: https://youtu.be/XaS6Eh3Ekd4

ECBDownload

See our other resources:

  1. Resource Centre on ECB
  2. ECBs become Easy: RBI liberalises norms for external commercial borrowings
  3. Presentation on ECB

Unlocking Access to Public Markets: Regulator brings Relaxation to Minimum Public Offer and Shareholding Rules

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– Team Corplaw | corplaw@vinodkothari.com

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SEBI’s ease of doing business for trusts and amendment in ‘Fit and Proper person’ criteria

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– Abhishek Namdev, Assistant Manager | corplaw@vinodkothari.com

Snippet _ SEBI BM_23.03.2026Download

Corporate Laws Amendment Bill: Recognizing LLPs in IFSCA, decriminalisation  and easing compliances for AIF LLPs

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– Team Corplaw | corplaw@vinodkothari.com

In line with an overhaul of changes proposed in the Companies Act, 2013, the Corporate Laws (Amendment) Bill proposes some changes in the Limited Liability Partnership (LLP) Act, 2008. Aimed at greater ease of doing business for corporates, the proposals are dominated by provisions to recognise LLPs operating in International Financial Services Centres by allowing them to issue and maintain share capital in foreign currency as permitted by the International Financial Services Centres Authority . Further, decriminalisation of various procedural defaults under the LLP Act have been provided for by replacing criminal provisions with civil penalties, , and easing compliances for Alternative Investment Funds which are formed asLLPs. 

Following definitions added: 

  • IFSC and IFSCA inserted and aligned with definition in International Financial Services Centres Authority Act, 2019
  • “Permitted foreign currency” to be specified by IFSCA in consultation with CG
  • “Specified IFSC LLP” meaning an LLP set up in an IFSC, and regulated by IFSCA
    • To facilitate LLPs operating in International Financial Services Centres allowing them to issue and maintain share capital in foreign currency

Specified IFSC LLPs

  • Registered office to be in IFSC
  • “IFSC LLP” to form part of its name.
  • If any LLP is regulated by SEBI or IFSC, primarily meaning AIFs:
    • Details of changes in partners to be furnished to the Registrar annually. 
    • Manner of filing changes in LLP Agreement to be prescribed.
  • Monetary value of contribution by partner in Specified IFSC LLP to be accounted for and disclosed only in permitted foreign currency and any prior contribution also to be converted to such foreign currency.
    • Subsequent monetary contribution not allowed without converting the same into permitted foreign currency.
  • To prepare its books and records in the permitted foreign currency, however, may be allowed to prepare in INR, if permitted by IFSCA. [Section 34(1)]
  • Specified IFSC LLPs may be required to use permitted foreign current for filings under this Act, however, payment of fees/fines/penalties, to be made in INR. [Section 68]

Incorporation/Conversion of/into LLP 

  • Changes in the LLP agreement, names and other details of partner of those LLPs regulated by SEBI or IFSCA to be intimated as may be prescribed i
  • Requirement of compliance statement by advocate/CS/CA/CMA replaced by the requirement of an affidavit, only in cases where such professional is engaged
  • Specified IFSC LLP to state its objects of financial service activities as per Section 3(1)(e) of IFSC Authority Act, 2019 
  • Enabling provisions for conversion of a specified trust, established under Indian Trusts Act, 1882 or Central/State Act and registered by SEBI/IFSCA, having prescribed activities. primarily aimed at AIFs formed as trust, to convert into LLPs. [Sections 57A and 58]

Adjudication and Penalties

  • Decriminalising extant provisions providing for punishment with:
    • Fine of Rs. 2,000-25,000 for failure to comply with Registrar’s summons/requisition to a penalty of Rs. 10,000 for failing to comply with any requisition of Registrar (other than summons). [Section 38(4)]
    • Fine of Rs. 25,000-5,00,000 for LLP, and Rs. 10,000-1,00,000 for every DP, for failure to comply with requirements of maintenance of accounts, and annual Statement of Account and Solvency to Rs. 100/day upto Rs. 1,00,000 for LLP, and Rs. 50,000 for DP.
  • LLP/Partner/DP expressly permitted to make application suo moto for adjudication of penalty.
  • For failure to comply with any requisition of the Registrar, penal actions will apply instead of fine  
  • From the commencement of the proposed legislation, where a provision in respect of any offence provided in LLP Act has been amended to provide for adjudication under the said section, the manner of withdrawal of the complaint and the manner of transfer of such matter for adjudication under such section, whether pending in the Court or otherwise, shall be dealt with in accordance with such Scheme as may be notified by the Central Government.
  • Appeal allowed against decision of Registrar  regarding name reservation (Section 16) or declining to incorporate LLP (Section 12). [Section 68B]

Valuation

  • Provisions of Section 247 of Companies Act, 2013 to apply mutatis mutandis for valuation of partner’s contribution, property/assets/net worth i.e. only valuer registered with IBBI in accordance with Section 247

Read our coverage on the amendments proposed in the Companies Act, 2013 here.

Webinar on Corporate Laws (Amendment) Bill, 2026

RPTs: Testing Multiyear Contracts for Materiality

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– Saloni Khant, Executive | corplaw@vinodkothari.com

It is common for companies to enter into multi-year contracts in its usual business operations, to secure supply of goods or services, access to premises for operations, or for other commercial reasons etc. In the maze of RPT compliances, however, given that the transactions are usually approved by the Audit Committee and/ or shareholders on an omnibus basis, challenges arise on the ideal way of dealing with and taking approval for multi-year contracts.

The relevance of multi-year contracts in the context of RPTs arises for two reasons:

  • the value of contract that is required to be taken for the purpose of ascertaining materiality of a contract or transaction, and
  • the tenure for which the approval can be taken for such contracts.

Several questions arise:

  • Should the entire value of the contract be placed for approval, even if that results in crossing the materiality threshold, and requires going to the shareholders?
  • Or can the shareholders’ approval be circumvented by dividing the total contract value into yearly values and taking approval only for the estimated yearly transaction value?
  • If so, what happens if the contract is not approved by the AC in any subsequent FY within the tenure of the contract?
  • If the total contract value is approved, should the approved value be considered for materiality thresholds again for the next FY?

Divisibility of contracts into smaller relevant units

The crucial point in considering whether a contract requires yearly approval or one single approval valid for the whole contract is based on the “divisibility” of the contract – that is to say, its ability to be divided into smaller units instead of considering the contract as a whole. If it is a single contract for a fixed term, the approval of the contract is approval of the entire exchange of resources/services that takes place over such term.

The divisibility of a contract may be judged against various factors, for instance:

  • Tenure of the contract
  • Contractual milestones for payment based on performance 
  • Satisfaction of performance through delivery of goods or services under a contract etc.

We discuss each of these in detail below.

Fixed tenure implies single approval for whole tenure?

Several contracts may have a fixed tenure, but does the fixity of tenure itself implies that such a contract shall be required to be approved through a single approval – valid for the whole tenure of the transaction?

There may be several  contracts having a fixed term, but the fixity of term in itself may  not be the essential feature in all such contracts. For example, a contract might have been entered into 3 years for supply of certain goods or services. While the tenure of the contract is 3 years, each instance of supply of goods or services constitutes an independent divisible supply in itself. Hence, in such cases, merely based on the tenure of the contract, the indivisibility of such arrangement cannot be argued.

Performance or payment milestones in a contract

In a multi-year contract, there are usually payment milestones based on performance of the contract. For example, a contract for development of software may contain milestones, such as, (i) development of UAT model, (ii) development of final software interface, and (iii) activation of the software etc. While the contract value may be divided based on the three different stages or milestones specified in the contract – it is important to note that the performance of the contract becomes complete only upon activation of the software, and hence, the divisions based on the performance milestones do not have an independent existence. Hence, dividing the contract would not be feasible here.

Performance of contract: delivery of goods or services

The most important factor in considering the divisibility of a contract is the actual performance of the contract. Whether the contract is of such nature that the delivery happens “over a period of time”, or is it such that while the exchange of resources/ services take place over the tenure of the term, the performance may be said to be complete only “at a point of time”.

Period of time v. point of time: drawing reference from Ind AS 115

In order to understand the divisibility of a contract based on ‘period of time’ v/s  ‘point of time’- reference may be drawn from its closest equivalent under Ind AS 115 read with its guidance note for the purpose of revenue recognition.

Divisible contracts: satisfaction of performance obligations over a period of time

Ind AS 115 specifies conditions based on which it may be said that the performance obligation is satisfied and revenue is required to be recognised over a period of time: [Para 35]

  • The nature of the activity is such that the counterparty is able to enjoy the supply simultaneously as it is made.
  • In case an asset is created/ enhanced, it remains within the control of the counterparty during such creation/ enhancement.
  • In case the nature of the asset so created is such that it has no alternative use and the payment terms provide that the supplier has a right to payment for supply till date.

Where none of these conditions are satisfied, the performance obligation in the contract is considered to be satisfied at a point in time.

(a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;

The key question here is if the performance of the contract is stopped midway, would the customer still be considered to have benefitted from the performance already done?

For e.g., in a rental agreement, the tenant takes the benefit of the premises simultaneously. Even if the tenancy is terminated midway, it does not take away the benefits already enjoyed by such tenant during the period of the contract,  he would remain benefitted for the fulfilled period of tenancy.

This may be compared with a construction agreement, where, in the event of an early termination of the contract, the performance obligations would remain incomplete, with no benefits to the customer for the period of time during which the service has been performed prior to its termination. Even where the work is rerouted to another supplier, it would require substantial rework.

(b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced;

The renovation of an office building owned by the customer would amount to a contract over a period of time. The service may be terminated midway and can be completed by another service provider since the control of the asset remains with the owner at all times.

(c) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

The term ‘an alternative use’ must be considered from the perspective of practical limitations and contractual restrictions. Where the nature of the asset is such that it cannot be redirected to another contract, for example – machinery with unusual specifications cannot be sold to another customer, it is said to not have an alternative use. Even where the resources are portable, but the contractual terms restrict such redirection, there is no alternative use.

In such cases, where a contract is terminated midway, the service provider must have the right to receive payment on quantum meruit basis i.e. the work is sufficiently divisible to assess the payment due to the supplier.

When a contract fulfills any of the three conditions, it satisfies one principle criteria:  

Any exit from the contract may require the contractual parties to replace the party, and may have penal consequences, but it is not as if the contract was not performed at all.

Manner of seeking approval

Where the transaction is a single indivisible contract i.e. takes place over a period of time, the IND AS recognises revenue over time by measuring the progress in the performance of the contract[1]. Accordingly, the transaction must be placed in its entirety with its full value for approval before the audit committee, the board of directors and the shareholders (if the materiality threshold is crossed). The transactions placed before all the three bodies must be aligned. Once approved, the actual implementation of the transaction shall come merely for review before the audit committee on a yearly basis in terms of section III.B.5 of the SEBI Master Circular dated January 30, 2026.

An interesting question arises here. Once approved, shall this amount be aggregated with new proposed transactions in the next year? Let us consider an illustration here. The materiality threshold for A Ltd. (listed entity) is Rs. 2000cr. In FY 25-26, A enters into a construction contract (single indivisible multiyear contract) and in FY 26-27, a contract for purchase of goods (one off transaction) with B Ltd for various amounts as tabulated below:

S. No.FY 25-26FY 26-27
Construction Contract Amt (Rs.) (I)Whether I is material and approved by shareholders?Purchase Contract Amt (Rs.) (II)Whether II is material and needs shareholders’ approval?Whether (I) and (II) shall be aggregated for materiality threshold?Does the aggregate of (I) and (II) cross the materiality threshold?Whether (I) shall be placed for noting before shareholders?
11000crNo500crNoYesNoNo
21000crNo1500crNoYesYesYes
31000crNo2300crYesYesYesYes
43000crYes1NoNoNoAlready approved by the shareholders
53000crYes2500crYesNot requiredYes

For the first 3 cases, the transactions are aggregated for testing the material threshold since transaction (I), even though ongoing in FY 26-27, has never been placed before the shareholders. In effect, in case 2, the actual transactions ongoing with B in FY26-27 are crossing the materiality threshold and thus, must be placed for approval before the shareholders.

In case 3, while Transaction (II) crosses the threshold independently, it is only logical for the shareholders to be apprised of the other ongoing transactions (Transaction I) with the same RP to understand the true position of the transactions between the RP and the listed entity. The Industry Standard Note on RPTs (ISN), anyways, requires this disclosure. [Part A(3)] Read our latest article on the ISN: Repetitive Overhaul: RPT regime to get softer

In case 4, Transaction (I) has already been placed before the shareholders for approval. If its value is aggregated with Transaction (II), even a Rs. 1 transaction will require the approval of the shareholders. The essence of the materiality thresholds is seeking approval for material contracts. Such aggregation would defeat the very intent of the law.

In case 5, Transaction (I) is already approved by the shareholders and Transaction (II) crosses the materiality threshold independently. There arises no question of aggregation.

Thus, the decision of aggregating the value of a single indivisible contract in the previous FY for materiality thresholds in the current FY depends upon

  • whether such aggregated value crosses the thresholds in the current FY;
  • whether the transaction in the previous FY crossed the thresholds back then.

On the other hand, where the transaction is a divisible contract over a term, the estimated value to be utilised in that particular year may be placed for approval  before the audit committee, board of directors and shareholders, as the case may be. In case a material transaction was approved by the audit committee on an omnibus basis, it shall continue to be placed before the shareholders. [Section III.B.5 of the Master Circular]. Since the yearly value of the transaction is being approved and utilised, there arises no question of aggregation of previously approved value with proposed transactions in a new FY.

Specific disclosure of tenure of multi-year projects

The law enables securing transparent approvals for indivisible contracts. The ISN requires an estimated break-up financial year-wise in case of a transaction spanning over multiple years to be placed before the audit committee as well as shareholders, as the case may be [Para A5(5)]. (See our FAQs on the Industry Standard Note)

Further, while disclosing RPTs on a half yearly basis as a part of quarterly integrated filing (governance) to the stock exchange, the Master Circular requires disclosure of the aggregate value of the RPT as approved by the Audit Committee as well as the value of transaction during the reporting period.

Conclusion

With SEBI settling RPT approval related non-compliances for settlement fees running into crores[2], compliance officers need to tread more carefully than ever. Deciding whether a multi year contract should be approved as a whole or in parts remains a crucial decision, particularly in the absence of detailed guidance under Companies Act and SEBI LODR. While accounting standards primarily address revenue recognition and may not directly apply to all RPTs, the principles outlined therein can still offer useful guidance in navigating such situations.

[1] Para 39 of the IND AS 115

[2]https://www.sebi.gov.in/enforcement/orders/feb-2026/settlement-order-in-the-matter-of-kalyani-steels-limited_99922.html

Refer to our other resources:

  1. RPTs: Do extreme comparables distort arm’s length?
  2. Representation to SEBI for RPT provisions of LODR
  3. Related Party Transactions- Resource Centre
  4. Moderate Value RPTs : Interplay of disclosure norms and impracticalities

Webinar on Corporate Laws (Amendment) Bill, 2026

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Register here: https://forms.gle/1iR2xaFKGBU1kRJ3A

Webinar on CLAB, 2026.pptxDownload

Read our brief analysis of the proposals here:

Corporate Laws Amendment Bill: Easing, Streamlining and  Updating the Regulatory Framework 

Corporate Laws Amendment Bill: Recognizing LLPs in IFSCA, decriminalisation  and easing compliances for AIF LLPs

Corporate Laws Amendment Bill: Easing, Streamlining and  Updating the Regulatory Framework 

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– Team Corplaw | corplaw@vinodkothari.com

The Statement of Objects and Reasons refers to the Govt’s constant “endeavour to facilitate greater ease of doing business for corporates”; after reading through the provisions of the Bill, that indeed seems to be the intent, though, as happens often, the intent may get miscarried.  The provisions are admittedly inspired by the recommendation of the 2025 High Level Committee on Non-financial Regulatory Reforms.

Broadly, the Bill focuses on decriminalisation, streamlining of provisions, bringing more audit quality oversight with powers to NFRA, regulation of the profession of valuations, etc. While doing so, it also makes the provisions of the State more aligned to present day realities, permitting greater digitisation, recognising concepts such as stock-appreciation rights or similar share-related benefits, etc. Note that the Bill has been referred to the Joint Parliamentary Committee.

Directors and KMPs

  • Directors related 
    • Independence criteria for Independent director
      • Clarification u/s 149(6)(e)(i) and (ii) referring to disability of a person to be appointed as ID in case of his association with the appointee company, its holding, subsidiary, associate or their auditor for not just “three financial years immediately preceding the financial year”  but also “or during the current financial year”. 
      • Amount of transaction allowed with a legal or consulting firm whose employee / partner / proprietor may be appointed as the ID of the company / its holding / subsidiary / associate has been changed from “10% or more of the gross turnover of such firm” to “amounting to 10% or such lower per cent., as may be prescribed of the gross turnover of such firm”
        • Where the transaction of such legal or consulting firm with the company, its holding or subsidiary or associate company is less than the prescribed thresholds, the ID may continue his association with the legal or consulting firm
      • Clarification: that every ID shall ensure that he continues to fulfil the requirements specified under sub-section (6) during the term of his appointment.
      • The restriction in respect of appointment or association in any other capacity during cooling off period of three years is applicable to the company as well as its holding, subsidiary or associate company.
      • Clarification: any period during which an ID has served as an additional director of the company, shall be included in his tenure as an ID
    • Additional director
      • An additional director may hold office up to the date of the next general meeting or up to a period of three months from the date of his appointment, whichever is earlier.
    • Restriction for appointment of a person not considered / approved to be director in a general meeting
      • a person whose appointment as a director could not be considered or could not be approved in a general meeting, shall not be appointed by the Board as an additional director, or alternate director or a director against a casual vacancy without the prior approval of its members
    • Disqualifications of a director
      • Clarified: While sec 188 has been decrimilarised since 2020, the respective reference u/s 164(1)(g) was not amended. Post amendment, a person has been subjected to a penalty for default under section 188 of the said Act will be disqualified from appointment. 
      • an auditor or a secretarial auditor or a cost auditor or a registered valuer or an insolvency professional of the company or its holding, subsidiary or associate company discharging the functions as such under the Act or under the IBC during the immediately preceding three financial years or during the current financial year, shall be disqualified to be appointed as a director.
      • What  or who is a “fit and proper person”
        • Criteria shall be prescribed in the rules
      • Reduces the period of non-filing of financial statements or annual returns from “3  financial years” to “2 financial years” so that companies are more diligent in filing such documents within time.
      • Default of sec 164(2) will lead to vacancy of office in every company where he is a director (including the company which is in default under that sub-section), after six months from the date of incurring such disqualification or upon expiry of his tenure in such company, whichever is earlier. Proviso to sec 167(1)(a) also proposed to be amended.  Of course, the automatic vacation of office takes place 6 months after the disqualification. This may result in a curious situation where every director of a defaulting company gets disqualified, leaving the company headless. How does a headless company ever come out of the default is a curious question. 
  • Board Meeting 
    • Small companies / OPC and dormant companies may have one BM in a calendar year against the requirement of one BM in each HY.
    • Subsequent disclosure u/s 184(1) will be required only in case of  any change in the disclosures made and not “at the first meeting of the Board in every financial year”.
  • Sec 185 (clarification)
    • LLPs are also covered along with firms u/s 185(1)(b) i.e company cannot extend loan / guarantee/ security in connection with loan to even LLPs where the directors / their relatives are partners 
  • Resignation by whole time Non director KMP – New insertion 203A.
    • CFO, CS may resign giving notice in writing to the company, 
    • Board shall take note and shall intimate the RoC:
    • In case of failure to intimate RoC by Board, said KMP may forward a copy of his resignation along with detailed reasons for his resignation to the RoC
    • Resignation takes effect from the date on which the notice is received by the company or the date, if any, specified by such KMP in the notice, whichever is later. This is, again, surprising as KMPs are not only office-holders, they are also bound by the contractual terms of their employment. It is unthinkable to think of an employment contract that allows an office holder at that level to resign with immediate effect. While the very intent of this provision is difficult to understand, in our view, the only way to align this with employment contracts is to say that for giving the notice u/s 203A, the KMP shall have to adhere to the employment contract. 
    • Such KMP will be liable even after his resignation for the default for which he was liable during his tenure.
  • Secretarial Audit  – Sec 204
    • Allowing multi disciplinary firms with majority of PCS as partners to undertake secretarial audit
  • Directors Report 
    • Additional disclosure in directors report:
      • While the management is required to explain or comment on every observation, comment or adverse remark of auditor, specific attention has been made to comment on matters relating to:
        • financial transactions
        • matters which have any adverse effect on the functioning of the company
        • maintenance of accounts
      • details in respect of composition of the ACB and where the Board had not accepted any recommendation of the ACB, a statement along with the reasons for the same

Issuance and buy of securities 

  • Private placement offences become more punitive: Proposed amendment to increase the penalty for private placement offences to Rs 2 crores or up to the amount involved in the placement, whichever is lower. This may potentially relate to some of the so-called private placements against which adjudication orders were made by some registrars. Read our related articles
  • More flexibility for Buyback of shares [Sec 68]
    • Power to prescribe different percentage of maximum buy-back value (based on aggregate of paid-up capital and free reserves) for prescribed class of companies
      • Currently the maximum buy-back size is 25% of aggregate of paid-up share capital and free reserves for all classes of companies
      • It appears that the government may offer more flexibility for scaling down business by companies; notably, the tax provisions for buybacks were rationalised by the Finance Act, 2026.
    • Enabling prescribed class of companies to make upto two buyback offers in a year; with minimum gap of 6 months between closure of first buyback offer and opening of second buyback
      • Such enabling clause is proposed for companies that are debt-free
      • Currently, minimum time gap between two buyback offers shall be atleast 1 year 
    • Doing away with the requirement of affidavit for declaration of solvency by the directors
  • Share capital of IFSC companies 
    • Section 43A inserted
      • Companies set up and incorporated in IFSC are allowed to convert, issue and maintain capital in permitted foreign currency
        • IFSCA will prescribe regulations. 
      • Books of accounts, financial statements and other records to also be aligned to be prepared in the  permitted foreign currency unless IFSCA permits to maintain these in Indian rupees

Presently, the Companies Act does not include specific provisions to enable companies to prepare accounts or financial statements in foreign currencies. Taking into account the nature of companies set up in IFSC jurisdiction, this is a welcome change. It also seeks to clarify that such companies shall pay fees, fines and penalties under the Companies Act and the rules made thereunder in Indian rupees.

  • Recognition of other forms of share-linked benefits, such as SARs, RSUs etc.  
    • Inclusion of reference to “or such other scheme linked to the value of the share capital of a company” in certain provisions, such as:
      • Issue of shares to employees on preferential basis in addition to ESOPs [Sec 62(1)(b)]
      • Class of security holders to be excluded while counting the number of allottees in a financial year for private placement limits [Sec 42(2)
        • Reason – executive compensation is issued with approval of shareholders
      • Enabling buyback of such securities [Sec 68(5)(c)]
  • Come-back provision: Trust not to be recognised as member [Sec 88(2A)]
    • The good old principle of CA 1956, that no notice of trust shall be taken in the register of members, subsequently removed in CA 2013, is now finding its way again.
    • Quite likely, the trigger may have been FATF concerns, to ensure that beneficial ownerships are not garbed under the so-called notice of trust. 
    • However, the classic principle that companies shall not recognise holding of shares in fiduciary capacity belongs to the bygone era where shares were partly paid, and companies had difficulty in claiming money from the contributories. In recent practices, the law specifically requires noting of beneficial interest [sec. 89] – hence the relevance of this provision is difficult to understand.

Dividend and IEPF 

  • Dividend and IEPF 
    • Clarified that the dividend not paid / claimed on the shares which has been transferred to IEPF, shall also be transferred to IEPF
    • Clarified that amounts in respect of shares bought back and extinguished, remaining unpaid or unclaimed for seven or more  shall be credited to IEPF

Audit and Auditors 

  • Audit and auditors
    • Non audit services
      • an auditor or audit firm of prescribed class or classes of companies shall not provide, directly or indirectly, any non-audit services to the company or its holding company or subsidiary
      • restriction under s. 144 shall also apply for a period of 3 years after the auditor or audit firm has completed his or its term u/s 139(2)
    • Fine prescribed for sec 143 (except sub-section 12) and sec 146
      • This will mean, if the auditor is not attending the general meetings, he shall be liable to fine and punishment under sec 147(2)
    • Cost Audit
      • Empower the Central Government to provide standards of cost accounting by rules, after examination of recommendations of the Institute of Cost Accountants of India.

NFRA 

  • Strengthening NFRA – Sec 132
    • NFRA shall be a body corporate 
    •  Chairperson shall have the power of general superintendence and direction of affairs of NFRA.
    •  the executive body of NFRA may, by way of a general or special order in writing delegate such of its powers and functions as it considers necessary to the chairperson
    • NFRA can give orders relating to imposing penalty or debar the member of the firm
    • NFRA can also give warning or censure to the member or the firm or may require additional professional training of the member or the firm or can also refer the  matter to central government for taking action 
    • any person who fails to comply with any order of the NFRA u/s 132(4) or fails to pay the penalty imposed shall be liable to punishment with imprisonment, fine and further period of debarment. 
    • NFRA shall meet at such times and places as specified by regulations of the  said authority.  
    • Appointment of secretary and such other employees shall be done by the NFRA.
    • No act or processing of NFRA shall be invalid merely by the reason of- 
    • (a) any vacancy in, or any defect in the constitution of such Authority; or (b) any defect in the appointment of a person acting as a member of such Authority; or (c) any irregularity in the procedure of such Authority not affecting the merits of the case. Subsection(16) to be inserted 
  • Intimation of registration details of auditors and filing of returns  – Section  132A
    •  No firm shall be appointed as auditor unless the individual or firm  intimates the details of his or its registration with the ICAI, to the NFRA within such time.
    • The auditors shall file such documents or returns or information with the NFRA, , as may be specified by regulations by the said Authority
    • Non compliance with the above provision shall attract penalty  of not less than twenty-five thousand rupees, but which may extend to five hundred rupees for each day during which such default continues, subject to a maximum of twenty-five lakh rupees, if such person is an auditor or an audit firm
    • If a person while performing his duties under this section, knowingly furnishes false information, omits material facts or wilfully alters/suppresses/destroys required documents he shall be liable to penalty of not less than fifty thousand rupees, but which may extend to one thousand rupees for each day during which such default continues, subject to a maximum of fifty lakh rupees, if such person is an auditor or an audit firm.
  • Section 132B
    • The CG may make grants to the NFRA.
    • NFRA fund shall be created and the following shall be credited there:
  • Grants by the Central government 
  • All fees received by the authority
  • All sums received by the said authority from such other sources
  • Interest  or other income received out of the investments made by NFRA.
  • The fund shall be applied for meeting the expenses of NFRA for the discharge of its functions.
  • NFRA can now give directions to the certain classes of companies as it considers appropriate.
  • NFRA can hold inquiry and it shall have power to summon and enforce attendance of any person
  • There are some more changes relating to NFRA which are not very relevant.

Corporate Social Responsibility 

  • Corporate Social Responsibility
    • Enhancing applicability threshold of net profit from 5 crore to 10 crore  under 135(1) 
    • Enable additional time period for transfer of unspent CSR amounts relating to ongoing projects to the Unspent CSR Account from “30  days” to “90 days” i.e extending the time till 29th day of June of each year. 
    • Companies having minimum CSR spent u/s 135(5) up to 1 crore (or such other higher amount) need not constitute the CSR Committee [sec 135(9)]
    • New insertion: prescribed class or classes of companies which fulfil prescribed conditions shall not be required to comply with the section

Schemes 

  • Easing of Schemes of arrangements
    • An important and welcome change: Schemes of arrangement will not require adjudication by multiple NCLTs in case of multiple states. Proviso to sub-section (1) allows the matter to be disposed of by the NCLT of the transferee or resulting company’s jurisdiction. Currently, a lot of time is lost as each Bench continues to wait for the orders of the other.
    • In case of  fast track mergers, applications are filed before jurisdictional RD by transferee/ resulting company, and in cases where the RD found that the application is not in public interest or in the interest of the creditor, RD is required to file an application to the Tribunal. Now, such application is to be made to the Tribunal  having jurisdiction over the transferee/resultant company only.
    • In case of demerger, a report from OL will not be  needed.
  • Fast Track mergers [Sec 233]
    • The amendment reduces approval requirements in the following manner- –
      • In case of members,  twin test approval will be applicable. i.e. ‘Majority in number representing 75% in value of the members present and voting’
      • In case of creditors, 75% majority in value will suffice as opposed to the present 90%..
    • Central Government gets power to make rules procedures with regard to fast track mergers u/s 233. 
  • A new Section 233A has been introduced, dealing with ‘Treasury shares’
    • While sec 230 and 232 specifically provides that any treasury shares arising as a result of a compromise or arrangement shall be cancelled and extinguished, however treatment w..r.t. Shares held prior to commencement of CA, 2013 are not provided in the Act.
    • To avoid misuse of voting rights vide such treasury shares, Section 233A now provides a three-year sunset period requiring all existing treasury stock in entities to not carry voting rights after such period.
    • Consequence of non compliance with the above is also prescribed as follows-
      • In case of failure to comply within the prescribed period of 3 years,  such shares shall be  cancelled or extinguished, and such extinguishment or cancellation will be treated as capital reduction
      • Further, non compliance will attract a penalty of Rs. 10,000/-  per day during which the default continues to the company and every officer in default.

IBBI to be Valuation Authority; valuers get significant powers and responsibilities 

  • IBBI – Appointed as “Valuation Authority” and entrusted with the powers to grant certificate to Registered Valuers and Valuers’ Organisation and imposing penalties in Registered Valuers
  • Appointment of a valuer will be done with audit committee resolution:
    • The new requirement that appointment of valuers will have to be done by the audit committee should be read with sec 247 (1) – it only relates to such valuations as are required under the Act.
  • Several powers, including those for regulation making, are proposed to be given to IBBI.

Striking off names of defunct companies – [Sec 248]

  • Conditions for strike off names by RoC becomes  to introduce other grounds
    • non happening of any significant accounting transaction in the preceding 2 years and in the current FY.
      • Meaning of significant accounting transaction same as u/s 455
    • Additionally, has not filed financial statements or annual returns that were due to be filed for two consecutive financial years preceding the previous financial year
    • An illustration to clarify the same has also been inserted.
    • In case of opting for striking off by companies, ‘manner of extinguishing liabilities’, to be prescribed vide Rules
    • The offence relating to filing an application for strike off in violation of the prescribed conditions has been decriminalised by replacing the penal provision with a monetary penalty
      • Earlier–  Punishable with fine which may extend to Rs. 1,00,000 
      • Now: Liable to a penalty of Rs. 50,000
  • Revival application u/s 252
    • If made within 3 years of striking off, application to be filed before RD
  • If made after 3 years but before 20 years, application to be filed before NCLT
  • Incorporation related 
    • Declaration from professionals required at the time of incorporation only if their services are engaged in the formation or incorporation of such company [Sec 7(1)(ba)]
  • Ease of compliances 
    • Charges related
      • Additional time for registration of charges for prescribed class of companies (for e.g. – small companies)
        • 120 days instead of existing 60 days from creation of charge after payment of such ad valorem fees as may be prescribed. 
    • Auditor appointment (small companies)
      • Class of companies like small companies to be prescribed who, upon fulfilment of the prescribed conditions, shall not be required to appoint auditors under Chapter X. 
  • Moving towards digitalisation 
    • Powers to prescribe certain class of companies that will be required to maintain a website, an email address and other modes of communication [Sec 12A]
      • The class of companies will be listed companies or other unlisted public companies meeting prescribed thresholds 
      • The form and manner of these modes will be prescribed
      • Details of website, e-mail address and other modes of communication, and the changes therein shall be intimated to the Registrar in the prescribed manner and timeline
    • Powers to prescribe class of companies that will be required to service prescribed class of documents to their members only through electronic means [proviso to Sec 20(2)]
      • Manner in which members may seek physical copies will be prescribed
    • Enable holding of AGM and EGM in fully physical/ virtual/ hybrid mode in the manner prescribed under the rules [Sec 96 and 100]
      • However, mandatory to hold AGM in physical mode atleast once in every 3 years 
      • Number of members referred to in sec 100(2) may put requisition for the meeting to be held in a hybrid mode
      • For fully virtual EGMs, notice period to be reduced from 21 clear  days to 7 days or such period and manner to be prescribed by the rules 
  • In case of specific requisition by members to hold meeting in hybrid mode, mandatory to conduct meeting in such form
  • Penalty and prosecution 
    • Fixed penalty prescribed in place of a range of penalty 
    • The penal proposals inter-alia include the following: 
Section ActionExisting Penalty Proposed Penalty
4(5)(ii)Name applied by furnishing wrong or incorrect information Upto 1 Lakh50, 000
42(10) Makes offer or accepts money in contravention of sec. 42Upto money raised through private placement or 2 crore, whichever is lowerMoney raised through private placement or 2 crore, whichever is lower
128(6)MD, WTD, CEO fails to comply with Section 12950,000 – 5,00,005,00,000 – listed company and 50,000 -any other company
166(8) Director  violated the provisions of sec. 166 except sub-section (5) 1 lakh – 5 lakh Listed company – 5 lakhOther company – 2 lakh 
189Fails to comply with provisions w.r.t Register of contracts or arrangements in which directors are interestedNA2 lakh
446BLesser Penalty for certain companiesIn case of Company- upto 50% of penalty specified in provisions upto 2 lakh
In case of officer in default or any other person- upto 50% of penalty specified in provisions upto 1 lakh		In case of Company- 50%  or such per cent not exceeding the 50% penalty prescribed in such provision upto 2 lakh
In case of officer in default or any other person-50%  or such per cent not exceeding the 50% penalty prescribed in such provision upto 1 lakh
  • Fixed penalty in case of non-compliance under sec 152, 155, 156. Also fixing a maximum penalty upto 5 lakh in case of continuing non-compliance. 
  • Decriminalisation of offences under following provisions, including:
Section ActionExisting FIne Proposed Penalty
128(6)MD, WTD, CEO fails to comply with Section 12850,000 – 5,00,0005,00,000 – listed company and 50,000 -any other company
147(1)Punishment for contravention of provisions of sections 139 to 146Company- Fine – 25,000 – 5,00,000
OID – Fine – 10,000 – 1,00,000 		Company – Penalty – 1,00,000 – 5,00,000
OID – Penalty – 25,000 – 1,00,000
166(7)Default in complying with Section 166 except sub-section (5)Director – 1,00,000 – 5,00,000Listed company – 5,00,000Any other Company – 2,00,000
167(2)In case a Director continues as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualificationsDirector – 1,00,000 – 5,00,000Listed company – 5,00,000Any other Company – 2,00,000
  • Realigning the financial year to the period ending on 31st March
    • Companies / body corporates which have changed their FYs pursuant to NCLT approval, may realign it back to period ending 31st day of March of the following year though:
      • Approving the application; or
      • On commercial consideration
  • Expansion of definition of small companies
    • increasing the upper limit of paid-up share capital to Rs 20 crore from existing 10 crore and upper limit of turnover to Rs 200 crore from existing 100 crore [sec 2(85)]

Compounding of certain offences [Sec 441]

  • Increase of  amount of fine involved to INR 1 crore for the RD to take up compounding matters 

Miscellaneous [Sec 447- 470]

  • Increase in limit of amount involving fraud 
    • The threshold for applicability of fraud leading to minimum 6 months  imprisonment increased to 25 lacs instead of 10 lacs. Any fraud involving an amount lesser than that also liable to face imprisonment which can extend to 5 years and/or fine of 1 crore rupees (earlier 50 lacs rupees).
  • Decriminalisation of certain offences like improper use of word ‘limited’ or ‘private limited’ 
  • CG reserves the power to issue  guidelines circulars and directions , for clarifying the intent of a provisions or laying out the procedural requirement with or without holding consultation with experts
  • Non disclosure of source of information where investigation has been probed by into SFIO
  • In the context of ‘Dormant Company’, significant accounting transaction also excludes receipt or payment not relatable to the business or operations of the company
  • Adjudication of Penalties
    • Assistant Registrar additionally may be appointed as adjudicating officers for adjudging penalty
    • CG to notify additional appellate authority in addition to RD, not below the rank to Joint Director
    • Appointment of Recovery officer for recovering penalty under the Act from persons who fail to pay with power to attachment and sale of movable and immovable property [Sec 454B]
    • Constitution of “Specified Authority” for conducting the settlement proceedings for contraventions which shall be liable for penalty under Act [Sec 454C]

Read our coverage on the amendments proposed in the LLP Act, 2008 here.

Webinar on Corporate Laws (Amendment) Bill, 2026

RPTs: Do extreme comparables distort arm’s length?

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– Saloni Khant, Executive | corplaw@vinodkothari.com

The relevance of “arm’s length assessment” in any related party transaction is non-negotiable. Arm’s length is a consideration that runs across all corporate transactions, including those with unrelated parties. However, where the party itself is at arm’s length, that is, unrelated, the question of the transaction terms being other than arm’s length does not surface. In case of related parties, going by the very nature, the party is not at arm’s length, which is precisely why the need to establish arm’s length arises.

Typically, companies will have hundreds of transactions with unrelated parties. Obviously enough, these hundreds cannot be having a uniform price. It does not require elaboration to say that in business reality, prices have a range, and not a single price. When companies try to justify their impugned transactions with a related party, the practice quite often is to pull one value out of the range of values with unrelated parties, juxtapose that with the proposed RPT, and thus find a justification for the arm’s length.

Is one value out of the range of values sufficient to establish arm’s length? Or does AL have to be the central tendency (that is, a median or modal value) out of the range? This is the point that this article tries to deal with.

Additionally, the article also deals with the meaning of arm’s length beyond pricing, ways of establishing arm’s length where comparables are not available to the company, compliances and consequences pursuant to non arm’s length transactions.

This brings us to the more basic question of what exactly is the “arm’s length terms”, and can it be established based on terms comparable at any specific point of the arm or is it the length of the arm that matters – based on which the middle point of the distribution becomes the ideal indicator of arm’s length. 

Meaning of arm’s length: How the regulators define the term?

There is no explicit mention of arm’s length under SEBI LODR. An explanation under section 188 of CA, 2013 refers to the term as follows:

‘The expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.’

The standards on auditing (SA 550 pertaining to Related Parties) also defines the term as:

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

Therefore, in order to consider a transaction to be at an arm’s length, two elements are important:

  • The transaction is undertaken on terms similar to those between unrelated parties, and
  • There is no conflict of interest, that is, the transaction is undertaken independently, in the best interest of the entities in question.

Similarity of terms with unrelated parties: are outliers good comparables?  

While considering comparables to establish arm’s length, companies often cherry pick a few transactions at similar terms with non RPs. But how difficult is it to engineer a near favourable transaction with a non RP? These transactions may be termed very differently from the majority of the transactions and yet appear to be comparables.

Illustrating the problem with Outliers

Let us consider this illustration where a company sells a product to its non RP customers at varying prices and its RP at Rs. 651. The management presents 4 transactions of series A (Rs. 650) to C (Rs. 652), done with unrelated parties, as comparable transactions, which establish the RPT to be at arm’s length. The audit committee is obviously not doing a full fledged factual examination, and therefore, may not even get into transactions of series D (Rs. 655) to F (Rs. 657) where most (25) of the transactions are placed.

Given the above diversity, can a transaction at Rs. 651, a value at an extreme left of the above frequency distribution, still be an arm’s length value? The key question is – does arm’s length justification come from just one from a range of values, or from the central tendency in the range?

Arm’s length is a question that is not limited to CA or LODR. Arm’s length considerations span over Income-tax law, GST law, audit framework, etc. In fact, corporate governance is all about transacting with arm’s length valuations. We will not even expect corporate laws to provide detailed guidance on whether the arm of the arm’s length can be long enough to pick an extreme value, or does it have to be the elbow of the arm, that is, the hump in the middle. 

The Income Tax Laws provides some guidance

The Income Tax Act provides several methods to determine arm’s length pricing for a transaction, of which, one shall pick the most appropriate:

  1. Comparable Uncontrolled Price Method: Price charged in a comparable uncontrolled transaction is identified and adjusted for differences, if any.
  2. Resale price method: price at which property/services obtained from an associated enterprise is resold to an unassociated enterprise – adjusted by a normal gross profit margin in a CU transaction, expenses, and differences, if any.
  3. Cost plus method: Direct/indirect costs are increased by an adjusted mark-up to such costs. Adjusted mark-up is normal gross profit mark-up arising in an uncontrolled comparable transaction adjusted for differences, if any.
  4. Profit split method: Combined net profit is split amongst enterprises in proportion to relative contributions. Relative contribution is evaluated on the basis of reliable external market data – unrelated enterprises performing comparable functions.
  5. Transactional net margin method: The net profit margin (computed in relation to costs incurred, sales effected, etc.) arising in a comparable uncontrolled transaction is adjusted for differences.[1]  

Where the most appropriate method is any method from (a) to (c) or (e) that leads to several values being possible ALPs, a dataset shall be constructed of such values. This is the guidance we get from Income Tax Rules:

  • If the dataset consists of at least 6 values, a range of ALPs shall be considered from the 35th to the 65th percentile of this range.[2]
  • If the actual price of the transaction is outside this range, the median of the range shall be considered as the ALP for the purpose of tax assessment[3].

This would easily eliminate the outliers. Cherrypicking of transactions would not work here since the majority of the transactions must be placed as comparables before the audit committee.

What if the transaction is priced at the other extreme of the range, in our example above,  say, at a price of Rs. 661. Because the transaction is that of a sale, selling at more than moderate prices is in the interest of the entity. . Yet, the RPT would not be at arm’s length. The Report of the Expert Group on Transfer Pricing Guidelines provides the rationale:

‘It must be emphasised that even a transfer price more favourable to the company than an arm’s length price is problematic. This is so because

(a) valuation is impacted by the possibility that the related party may demand an arm’s length price in the future and

(b) the threat to charge an arm’s length price in future could become a form of poison-pill/blackmail.’

Typically, once a price is determined to be arm’s length, it is arm’s length for either party to the bargain. Arm’s length is all about equilibrium, and equilibrium perfectly balances the interests of either party. The other way of saying this is that what is not arm’s length from the counterparty’s perspective should not usually be arm’s length from the perspective of the other party.

The Indian Judiciary on selection of comparables

The Indian Courts scrutinise comparables used to determine the ALP with a fine tooth comb. In the case of CIT v. Mentor Graphics (Noida) Pvt. Ltd., the ITAT noted how selecting comparables with wide differences in operating margins is faulty. On appeal, the Delhi High Court held that where the profit level indicator of just one comparable out of a set is lower than the tax assessee, the transaction cannot be at arm’s length.

The Global View

The OECD Transfer Pricing Guidelines [Para A.7.3] discourage considering extreme comparables and require the rationale for picking such transactions to be examined. The reason might be a defect in comparability or exceptional conditions being met by an otherwise comparable third party; not dissimilar to engineering favourable transactions with non RP.

The USA’s Electronic Code of Federal Regulations provides that to increase the reliability of comparables, an interquartile range from 25th to 75th percentile of a set of comparables must be used[4]. See Ukraine as well. The Code further provides that arbitrary selection of a comparable that corresponds to an extreme point in the range is unlikely to be at arm’s length.

From the judicial perspective, Courts scrutinize the methodology of determining comparables and disregard those which provide absurd [3] results.[The Coca-Cola Company & Subsidiaries v. Commissioner Of Internal Revenue]

Several other countries consider a range of comparables to determine ALP instead of a single comparable which may fall on the extreme end of a range of comparables. See Norway, Switzerland, Bulgaria.

Other aspects of arm’s length RPTs

Price is, but only, an element in the determination of arm’s length criteria for a transaction. The arm’s length assessment, in fact, is based on all the applicable terms of a transaction, as is customarily offered to an unrelated party, vis-a-vis its comparison with a related party.

An illustrative list of checkpoints for assessing arm’s length for various categories of transactions follow:

Nature of transactionRelevant factors for assessmentExamples for discussion
Granting of loansCredit profile of the borrower, Interest rate/basis of arriving at interest rate, Tenure, Security and security cover, Penal charges, Other covenants, Cost of funds to the lender company, End use of loan,Outstanding exposures,Power Bank Ltd. gives loan to A Pvt. Ltd. a company in which its director holds control without any prepayment charges and to other borrowers with similar profiles with heavy prepayment charges. This failure to levy prepayment charges indicates that the transaction may not be at arm’s length.
Providing guarantee in favour of RPCredit worthiness, Past defaults by the debtor,Obligations undertaken pursuant to guarantee agreement,Margin involvedNofin Ltd. (a NBFC) has a policy of not providing guarantee on behalf of persons with any default in repayment in the past 3 years. However, it provides a  guarantee on behalf of its related party which has defaulted twice in the past 3 years. This indicates that the transaction may not be at arm’s length.
Availing borrowingsCost of borrowing Security covenantsPre payment chargesA Ltd. (RP) lends to B Ltd. on the condition of a security cover of 50% as against requirement of 1.25 X for other borrowers. The security cover is grossly lacking; hence, even if the lending/ borrowing rate is arm’s length, the terms of security are not.
Sale of goodsPricing, Credit terms including advance receipts, Other covenants, Alternative options availableA Ltd. provides a credit period of 4 months to all its customers, except its RPs, where the period extends to over a year. Not only this, past records show that the RP has not paid for earlier sales, and new sales are made without interruption. his unusual credit period indicates that the transaction is not at arms’ length, even though at the same price..
Purchase of goodsPricing, Credit terms including advance payments, Other covenants, Alternative options availableA Ltd. does not pay in advance for purchase of any goods other than those purchased from its RP. This unusual advance payment indicates that the transaction is not at arms’ length even though at the same price.
Lease/ sub-lease of premisesRent charged (including terms for period increment), Security deposit, Tenure; lock-in period, exit rightsApportionment of common maintenance chargesY Ltd. has provided a part of its premises on rent to X Ltd. (a subsidiary) without security deposit as against the market practice of 3 months’ deposit. While the rental may be in line with the market, the absence of security deposit indicates that the transaction may not be at arm’s length.

How about unique transactions which do not have comparables?

Companies usually pick transactions with non RPs to establish arm’s length of RPTs. But as it so often occurs in group structures, how can arm’s length be established where the transaction is carried out exclusively with the RP? Sharing of premises, software, payment of brand usage fees are all transactions that do not have market comparables; the sole reason for carrying out such transactions is the counterparty being a RP.

Arm’s length terms in case of unique transactions is not a problem that does not have a solution. In fact, even in case of unrelated parties, there are often transactions which are tailored, specific or unique in nature. The assessment of fairness of pricing and terms of the transaction gets into several factors:

  • Burden and benefit analysis: What is the sacrifice, burden or cost incurred by either party to the transaction, and what is the benefit obtained by either. The idea is to at least equate the benefit with the burden. Consider, for example, the use of brand name or flagship name. The basis for charging a licensing fee is that the user entity gets the advantage of the reputation, brand value or goodwill associated with the flagship name or brand. Instead of a complete greenfield start, it gets the backing of an established name. Hence, the analysis will be: what is the profitability, revenue potential, borrowing cost or other outgo of the entity using the name, as compared to other similar starters which do not have the benefit of the name.
  • Cost split: In case of sharing of resources, the possible solution may be to split the costs on the basis of a relevant parameter. The relevant parameter will differ on the basis of the expense: for example, in case of using office space, it may be the headcount. In the case of IT resources, it may be transactional volume. Cost allocation techniques may be used here. Is it important to charge a mark-up on the costs? In our view, no, because neither party is doing resource sharing with a view to mark profits.
  • Benchmarking studies: If there are instances of similar or nearly similar transactions, it may be useful to benchmark the transaction against industry similars. The availability of data may be a challenge; but sometimes, even an anecdotal evidence may be useful. This is precisely how one would have got an assurance of fair pricing: for example, if you are engaging a consultant for a complex, one-off project, you would get comfort that you are not being over-charged by asking a few peers.

The simple rule is: if the RPT is originated, negotiated, priced and finalised using the same rigour, discipline, independence of approach and process as would have been deployed in case of any other transaction, we are doing what the law/regulations expect. On the contrary, if it is the relationship which is playing on the transaction, we clearly have an issue.

Conclusion

RPT controls have become an all-time favourite subject of the regulators. The recent surge in actions against the use of abusive RPT structures makes it evident that the relevance of RPT controls is expected to only increase ahead. With arms’ length considerations forming an integral part of RPT controls, moving from cherrypicking comparables to presenting appropriate comparables at the median of the range has become all the more important.

[1] Sec. 92C of the Income Tax Act, 1961 read with rule 10B of the Income Tax Rules, 1962 corresponding to section 165

[2] Rule 10CA(4) of the Income Tax Rules, 1962

[3] Rule 10CA(6) of the Income Tax Rules, 1962

[4] 26 CFR § 1.482-1(2)(iii)(C)

See our other resources:

  1. Representation to SEBI for RPT provisions of LODR
  2. Moderate Value RPTs : Interplay of disclosure norms and impracticalities
  3. Related Party Transactions- Resource Centre

Open but Guarded Gates: Relaxations for Border-Country Investments

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Vinita Nair, Joint Managing Partner and Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com

Updated on May 4, 2026

A 15th March 2026 Press Note from Department for Promotion of Industry and Internal Trade (DPIIT) implements the cabinet decision to align investments from land-border countries (LBCs) with “beneficial owner” definition of PMLA. Accordingly, where investments come from a non-LBC, where beneficial ownership traces back to LBC, either to a citizen of LBC or an entity set up there, the investments will be allowed only in approval mode. In our view, even if there are multiple such citizens or entities, the amendment requires an aggregation of the investments of all LBC citizens or entities.

The 15th March DPIIT Press note 2 (‘PN2’) was preceded by a decision of Central Government, on March 10, 2026 (‘CG press release’) relaxing the restrictions placed in 2020 on FDI from countries sharing land-border with India (LBC) by (a) prescribing a strict approval timeline of 60 days in case of specified sectors/activities of manufacturing in capital goods, electronic capital goods, electronic components etc and (b) by allowing certain investments under automatic route where the investors have non-controlling LBC Beneficial Ownership of up to 10%. The objective is to facilitate ease of doing business and attract FDI inflows especially in critical sectors. 

Effective date of amendment

DPIIT issued Press Note 2 of 2026 dated March 15, 2026 (PN2) amending the Consolidated FDI Policy with respect to eligible investors (Para 3.1.1). PN2 shall take effect from the date of notification of amendment in NDI Rules. A corresponding amendment in Rule 6 of the FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) was notified and published in gazette on May 2, 2026. Accordingly, the amendment takes effect from May 2, 2026.

Background

Since April 2020, in terms of rule 6 of NDI Rules and FDI Policy, prior approval of the government is required for any investment made by an entity from LBC  or where the beneficial owner of an investment into India (a) – is situated in LBC; or (b) is a citizen of such LBC. Likewise, any transfer of ownership of existing or future FDI that results in the beneficial ownership of the investment shifting to a person who is a citizen of, or situated in, a LBC also requires prior government approval. 

These requirements were notified pursuant to Press Note No 3 dated April 17, 2020 and subsequent notification of FEMA (Non Debt Instruments) Amendment Rules, 2020. Refer to our earlier write-up titled India seals its borders to corporate acquisitions dealing with the said press note. Our earlier you-tube video covering the overview of FDI can be accessed here.

In order to meet the objectives of Aatmanirbhar Bharat and increase FDI inflows, India has decided to revisit the restrictions placed during Covid pandemic to curb opportunistic takeovers/acquisitions by Chinese companies. In this article we discuss the changes approved and notified by way of PN2 and amendments made in NDI Rules effective May 2, 2026.

  1. Investments received from LBC

Prior approval of the government is now required for any investment made by an entity or citizen from LBC.  The approval requirement also extends to investments made in India where the beneficial owner of an investment into India is a citizen of LBC.

The restriction arising on account of being ‘situated in LBC’ has been deleted. This relaxes the requirement for individuals of different nationalities situated in LBC investing in India or receiving ESOPs from Indian companies, as they will no longer require government approval.

Accordingly, the amended position is as under:

  1. Investments received from non – LBC with BO of investments based in LBC

Prior approval of the government is now required for any investment by PROI from non-LBC, where the beneficial owner of an investment into India is a citizen/entity of LBC.

Meaning of ‘beneficial owner of an investment into India’:

Let us first understand the meaning of “investor entity”. 

It means the beneficial owner(s) of the investor entity incorporated or registered in a country other than LBC. Manner of identifying the beneficial owner(s) of the investor entity will be as discussed below in Clause 4.

  1. Applicability in case of transfer of ownership

Prior approval is required for any direct or indirect transfer of ownership of existing or future FDI in an Indian entity that results in the beneficial ownership of the investment into India shifting to an entity or a citizen of LBC.

  1. Scope of ‘beneficial owner’ (BO)

As per PN 2 and NDI Rules, the manner of identifying BO is aligned with Section 2(1)(fa) of the Prevention of Money-laundering Act, 2002 read with Rule 9 (3) of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules). The reference to PML rules is mainly for the thresholds (refer below). 

BO will be construed as vested with the LBC if the citizen(s) of LBC or entity (ies) incorporated/ registered with LBC  has/ have the ability to hold rights/ entitlements in excess of thresholds under PML rules or exercise control over the investor entity or ultimate control over the investee i.e the Indian entity in any manner:

  • directly or indirectly, 
  • individually or cumulatively, 
  • independently or collectively, 
  • whether acting together or otherwise.

Whether holdings by different citizens or entities of LBC to be aggregated?

In our view, yes. The intent is to allow investments from entities where the investors from LBC hold a non-controlling interest. Therefore, one will have to consider all investments put together.  The approval requirements have been further clarified by way of following illustrations:

Illustration 1

Illustration 2

Illustration 3

Illustration 4

One might argue that if neither of the persons referred above i.e. Mr. X or Mr. Y or Entity incorporated in LBC, are qualifying as ‘beneficial owners’ under PMLA Rules on a standalone basis, then why do we need to aggregate their shareholding? 

Here, reference needs to be made to the language of the proviso to Para 3.1.1.(c) of the FDI Policy and Explanation 2 to NDI Rules, which requires considering the rights/entitlements held – directly or indirectly, individually or cumulatively, independently or collectively, whether acting together or otherwise. The language seems to indicate that aggregation needs to be done irrespective of whether the person in question is acting independently or collectively or whether they are acting together or otherwise. Hence, in our view, one has to consider if investors of the Non-LBC with BO from LBC cumulatively hold in excess of the prescribed thresholds. 

  1. Ambit of ‘beneficial owner’under PMLA
  1. Investments with non-controlling stake permitted under Automatic route 

As per Para 3.1.1(d) of the amended FDI Policy, investments from an investor entity having any direct or indirect ownership by a citizen or an entity of LBC not requiring prior government approval shall be subject to reporting requirements as per the SOP laid down by DPIIT and prescribed by RBI.

  1. Investments by Multilateral Bank or Fund of which India is a member

The amended proviso to Rule 6 (a) of the NDI Rules clarifies that any Multilateral Bank (like World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, New Development Bank etc.) or Fund (like International Monetary Fund, International Fund for Agricultural Development etc) of which India is a member shall not be treated as an entity of a particular country, nor any country would be treated as beneficial owner of any investments made by such Bank/Fund in India.  This was not provided in PN2 and clarified vide amendment in NDI Rules.

  1. Other proposals approved in the CG press release pending notification 

Fixed 60 days timeline for government approval for critical sectors

Presently, the timeline for obtaining government approval for FDI ranges between 12–14 weeks.

Source: Annexure V of SOP for Processing FDI Proposals

In cases where the investee entities are engaged in the specified sectors / activities concerning manufacturing of Capital goods, Electronic capital goods, Electronic components, Polysilicon and ingot-wafer etc. a timeline of 60 days shall be adhered to for government approval, in view of the criticality. The list will be provided by DPIIT. The majority shareholding and control of such Investee entities should be with the residents. 

The Government will continue to assess the proposals on a case to case basis and accord approval. Recently, an electronics manufacturer company received MEITY approval for receiving investment of 26% in a joint venture from a Chinese investor.

Way forward

As discussed in the CG press release, the existing restrictions to cases where LBC investors only have non-strategic, non-controlling interests were seen as adversely affecting investment flows from investors including global funds such as PE/ VC funds. By loosening the said restrictions cautiously, greater FDI inflows and speedier fundraising can be encouraged, particularly into startups and deep techs while protecting the nation’s security interests. The relaxed norms aim to increase access to technology, facilitate ease of doing business for Indian entities and strengthen India’s position as an attractive destination for investment and manufacturing. 

Refer our other resources on FDI here