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

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Tagging auditors and TCWG to make amends 

– Team Corplaw | corplaw@vinodkothari.com

Introduction

NFRA moved the needle, and it is to be seen if the ocean starts boiling.! A 7th Jan 2026 circular from NFRA, addressed to listed entities and their auditors, seemed like an attention-drawer to standards of auditing which are already there, and yet, the auditing fraternity is holding meetings with boards and senior management of listed entities, to comply with what was always a compliance requirement. Does the 7th Jan circular bring up any new boxes to be ticked, any new procedures to be laid or responsibilities to be reiterated? As we detail out in this article, there may be need for action on several fronts on the part of listed entities – identification of nodal persons, listing developments that need to be communicated, constituting team for responding to the findings of the auditors in course of their audit other than those that sit in the audit report, formation of sub-groups of TCWG, etc. 

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From Bye Backs to Buy Backs: how new taxation rules impact equity extraction

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– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com

Finance Bill, 2026 brings tax relief to investors for share buybacks, by partially restoring the position that existed before the Finance Bill 2024 amendment. The 2024 Finance Bill changed the taxability of buybacks to impose tax on buyback consideration, taxing the entire “receipt” as “dividend”, implying tax at applicable regular tax rates rather than as capital gains.[See our article on the 2024 amendments here.] 

The 2026 Bill proposes omission of Section 2(40) (f), [dealing with deemed dividend] and amendments to Section 69,  [specifically dealing with tax on buybacks]. The net result of this:

  • Buyback consideration not to be treated as deemed dividend; 
  • Shareholder pays tax on the difference between buyback consideration received and cost of acquisition taxable as capital gains – depending on whether the gain in short term (20%) and long-term (12.5%)
  • In case of promoter shareholders, an additional tax, so as to bring the effective tax rate to 22% in case of corporate shareholders, and 30% in case of non corporate shareholders. No difference between short-term and long-term capital gains. 

Applicability of the amendments: The amended provisions apply for buybacks done on or after 1st April, 2026. The existing provisions were introduced effective 1st Oct., 2024 and therefore, they would have had a life of only 15 months.

Why buyback? 

Buyback is not merely a means of distribution of profits to the shareholders. There may be various reasons or motivations for which buyback may be done by a company, for example: 

  • Distribution or upstreaming of profits – Buyback is used as a means of distribution of accumulated profits (free reserves as well as securities premium) to the shareholders.
  • Scaling down of operations – It is a mode of scaling down the operations of the company, without going through the tedious process of capital reduction through NCLT. 
  • Selective exit to certain shareholders – Buyback may also be used as a means of providing selective exit to certain shareholders, based on pre-determined arrangements. This may include, for instance, exit to some strategic investor, or a particular promoter, or shareholders not willing to dematerialise their securities etc. 
  • Put options to strategic or private equity investors – In case of strategic/ private equity investors, the shareholder agreements may include clauses on exit through put options. One of the ways of giving exit to the shareholders exercising the put option may be through buyback of their shares. 
  • Encashment of stock options granted to employees – It is quite common primarily in case of start-ups, to go for buyback of ESOPs granted to employees, instead of issuing shares upon exercise of options. This helps in providing liquidity to the employees, while also avoiding dilution in the shareholding structure of the company. 

Concept of Buyback and Compliances Involved

  • Governed by section 68 of the Companies Act read with the rules made thereunder (also see figure 1)
  • Out of free reserves, securities premium or proceeds of issue of shares 
  • Only upto 25% of paid up share capital and free reserves, with shareholders’ special resolution
  • Maximum no. of equity shares cannot exceed 25% of total paid-up equity share capital for that financial year 

For detailed guidance on the procedure and compliances involved, refer to our FAQs on buyback here.

Figure 1: Buyback process and timelines under Companies Act

Reduction of share capital as an alternative to buyback 

For buyback of capital beyond the statutory limits, the provisions of capital reduction u/s 66 apply. With the buyback consideration being taxed as deemed dividends, capital reduction through NCLT route was also being seen as an alternate route for scaling down capital in a relatively tax-efficient manner. There are rulings favouring capital reduction as an alternative to buyback, for instance, the ruling of NCLAT in the matter of Brillio Technologies Pvt. Ltd v. ROC, subsequently also referred to by NCLT Mumbai in the matter of Reliance Retail Ltd. Some of these rulings even permitted selective reduction of capital.  See our article on reduction of capital here.

One of the primary deterrents in capital reduction u/s 66 of the Companies Act is the approval requirements – of the shareholders, creditors and even the NCLT. 

Buyback of shares vis-a-vis dividend on shares 

The scope of dividend distribution is quite narrower as compared to share buybacks. The primary difference between the two is in the source of payment. Dividend distribution can be made only out of surplus; where free reserves are proposed to be utilised for dividend payment, additional conditions are applicable. In no case, can such declaration be made out of securities premium, or proceeds of fresh issuance – which are permissible sources for buyback. Buyback, on the other hand, requires mere liquidity, availability of profits is not mandatory. Therefore, dividends are merely a way to upstream the earned profits; buyback can even be the way to scale down, for example, by releasing the share premium, or using one class of shares to buy back the other.

Once dividend is approved by shareholders with requisite majority, there is no provision for a shareholder to waive off his right to  the dividend [see our article on the same here], and unclaimed dividend, if any, are kept in a separate account to be transferred to IEPF. In case of buyback, while the same is also offered to all shareholders, the buyback consideration is paid only to such shareholders who tender their shares for buyback; the question of waiver of rights or unclaimed amounts does not arise.  

Buyback taxation: existing scenario vs new scenario

Particulars Finance Bill, 2024Finance Bill, 2026
Applicability for buybacks done w.e.f. 1st October, 2024w.e.f. 1st April, 2026  
Taxable as Deemed dividend. The holding cost of the bought back shares allowed as short term capital lossCapital gains 
Tax incidence on Recipient shareholderRecipient shareholder
Amount taxable Entire buyback consideration Gains on buyback, that is, Buyback consideration minus, cost of acquisition 
Rate of tax Applicable income tax slab rate LTCG – 12.5%, subject to exemption upto Rs. 1.25 lacs STCG: 20% In case of promoters: 22%/ 30% (depending on whether domestic company/ otherwise)
Differential treatment for promoter shareholders No Yes, additional tax rates apply 

Under the erstwhile regime, the entire buyback consideration was taxable as deemed dividend, with the cost of acquisition claimable as capital loss. In such a case, the higher the cost of acquisition on such shares, higher would have been disincentive in the form of taxing the cost component as dividends. The benefits of capital loss depend on the existence of capital gains, and hence, the effective tax rates on buyback could not be ascertained. 

In the amended tax regime, buyback consideration, minus, cost of acquisition, is taxed at flat rates of capital gains – 12.5%/ 20%, depending on whether the capital gains are long-term or short-term in nature. 

Disincentives under the extant regime and market reaction

The disincentives were two-fold: 

  1. Higher tax slabs: The treatment as “deemed dividend” resulted in higher tax rates for top bracket individuals, as compared to capital gains, chargeable @ 12.5%/ 20% – depending on long-term/ short-term capital gains. 
  2. Taxing entire consideration: The entire “receipt” was taxable, instead of the actual gains, that is, excess of the receipts over the cost of acquisition.
  3. Cost of acquisition as capital loss: The cost of acquisition was to be treated as short term capital loss. As a result, there is an advantage to those shareholders who have short-term capital gains to offset the short term capital loss created as a result of the buyback. Note that the deemed dividend, in case of corporate shareholders, may be claimed as a deduction u/s 80M.

Resultant market reaction: a sharp decrease in buyback offers during FY 24-25 as compared to previous financial years. As per the publicly available data in case of listed companies, the total buyback size for 2024-25 was ₹7,897 Crores when compared to 2023-24 with a buyback offer size of Rs. 49,836 crores, indicating a decrease of 84.2 per cent.

The number of buyback offers sharply declined, with only 17 instances of buyback offer by listed entities between 1st October 2024 till date (3rd February, 2026) as compared to about 36-40 instances in each of FY 22-23 and FY 23-24. 

How Finance Bill 2026 rationalises the tax treatment?

Pursuant to the Finance Bill, 2026, the buyback taxation appears to be rationalised in the following manner: 

  • Buyback consideration not to be treated as deemed dividend [omission of clause (f) to Sec 2(40)]
  • Difference between consideration received and cost of acquisition taxable as capital gains [S. 69(1)]
    • In the hands of the recipient shareholder
  • In case of promoter shareholders, tax payable at higher rates depending on whether promoter is a domestic company or not
    • Effective rate of 22% in case of domestic company and 30% in case of persons other than domestic company 

With this, while the tax incentive remains in the hands of the recipient shareholders, the tax treatment is rationalised in the form of value that is to be taxed and the manner in which tax is levied. However, the provision differentiates between a promoter and non-promoter shareholder. 

Meaning of promoter: moving beyond the statutory definition

In case of listed company

  • Refers to the definition of promoter under Reg 2(1)(k) of SEBI Buyback Regulations 
  • SEBI Buyback Regulations, in turn, refers to Reg 2(1)(s) of SAST Regulations
  • Under SAST Regulations, promoters include “promoter group” 
Promoter Promoter group
Person having control over the affairs of the company, or Named as promoter in annual return, prospectus etc. Includes immediate relatives of promoters Entities in which >20% is held by promoters Entities that hold >20% in promoters etc. Persons identified as such under “shareholding of the promoter group” in relevant exchange filings

The scope of “promoter group” thus, is much broader than “promoter”. 

In case of an unlisted company 

  • Refers to the definition of promoter under Sec 2(69) of the Companies Act 
  • Concept of promoter group is not there under Companies Act 
  • To broaden the scope, a person holding > 10% shares in the company, either directly or indirectly, has also been covered. 

Question may arise on what does “indirect” shareholding mean? Does it include shareholding through relatives, or through other entities as well?  The word “indirect” is not the same as “together with” or “persons acting in concert”. Indirect shareholding should usually mean shares held through controlled entities.

Why additional tax for promoters? 

The amendments bring higher tax rates for promoters, in view of the distinct position and influence of promoters in corporate decision-making including in relation to buyback transactions. Promoters may want to influence buyback decisions for various reasons, for example: 

  1. Providing exit to an existing promoter/ strategic shareholder in accordance with any existing arrangement 
  2. Creation of capital losses (assuming buyback consideration is lower than the cost of acquisition) thus setting off the capital gains earned from other sources
  3. Encashing securities premium or accumulated profits in the company etc. 

In view of the promoter’s ability to influence buyback decisions to meet own objectives, additional tax is levied on buyback consideration received by the promoters, thus addressing any tax-arbitrage that could have been created through buybacks.

See our Quick Bytes on Budget, 2026 at here

Our other resources on buyback at here

Buyback taxation rationalised with limited relief to promoter shareholders

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– Finance Bill 2026 omits deemed dividend treatment on buyback consideration 

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Our quick bytes on Union Budget 2026 can be accessed here – https://vinodkothari.com/2026/02/quick-bytes-on-union-budget-2026/

The recent Finance Bill 2026 brings relief to investors in the form of changes in taxation for buyback consideration. With the omission of sub-clause (f) from Section 2(40) of the Income Tax Act, 2025 [dealing with deemed dividend], the position as it existed prior to 1st October, 2024, has been restored, except for additional tax rates in case of promoter shareholders. 

  • Applicability of the amended provisions 
    • For any buyback of shares on or after 1st April, 2026 
  • Existing provisions on taxability of buyback 
    • Included u/s 2(40)(f) of IT Act 
    • The entire amount paid by the company taxable as “dividend” 
    • Tax payable by shareholders 
    • Entire buyback consideration taxable as dividend 
    • TDS provisions as applicable to dividends apply 
    • Taxable at slab rates as applicable to respective shareholders, with a flat surcharge @ 15%
    • Entire cost of acquisition in respect of shares bought back to be booked as “capital loss” [section 69 of IT Act]
    • Such capital loss may be set off against capital gains subsequently
      • As per section 111 of IT Act, the set-off is available for a period of 8 AYs immediately after the AY in which loss arises 
  • Amended provisions on taxability of buyback 
    • Buyback consideration not to be treated as deemed dividend [omission of clause (f) to Sec 2(40)]
    • Difference between consideration received and cost of acquisition taxable as capital gains [S. 69(1)]
      • In the hands of the recipient shareholder
    • In case of promoter shareholders, tax payable at higher rates depending on whether promoter is a domestic company or not
      • Effective rate of 22% in case of domestic company and 30% in case of persons other than domestic company 
  • Meaning of promoter 
    • In case of a listed company,
      • As per Reg 2(1)(k) of SEBI (Buy-Back of Securities) Regulations, 2018
        • Refers to the definition of promoter under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 
    • In any other case
      • As per Section 2(69) of the Companies Act, 2013, or 
      • A person who holds, directly or indirectly, more than 10% of the shareholding in the company
  • Example to understand taxability under old regime v/s new regime 
Particulars Price per shareNo. of shares Amount (Rs.)
Total cost of acquisition Rs. 50 1005,000
Shares tendered and accepted for buybackRs. 80403,200
Tax under old regime (effective 1st Oct, 2024)Rs. 80403,200 as dividend @ applicable tax slabs
Tax under new regime (effective 1st Apr, 2026)Rs. (80-50) = Rs. 30401,200 as capital gains @ short-term/ long-term capital gain rates 
  • Intent of the amendments 
    • The extant tax regime on treating buyback consideration as deemed dividend resulted in taxing a “receipt” as income, without factoring the cost incurred in such receipts. See our article on the same here. The amended tax regime restores back the past position, by treating the difference between the buyback consideration and cost of acquisition as capital gains. 
    • Additional tax rates have been proposed for promoters, in view of the distinct position
    • and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions.

See our other resources on buyback – https://vinodkothari.com/2024/08/resource-centre-on-buyback/

Quick Bytes on Union Budget 2026

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Our Resources

  1. Buyback taxation rationalised with limited relief to promoter shareholders
  2. State of Climate Finance: Domestic Resources Insufficient to Bridge Funding Gaps 
  3. Microfinance and NBFC-MFIs in Economic Survey 2026
  4. Economic Survey 2026: Key Insights on Infrastructure Financing

State of Climate Finance: Domestic Resources Insufficient to Bridge Funding Gaps 

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Economic Survey 2025-26 highlights the position of climate finance in India and developing countries 

Anushka Ganguly, Executive | corplaw@vinodkothari.com

The relevance of climate finance in climate action cannot be undermined, since climate change mitigation and adaptation require large-scale mobilisation of financial resources. The Economic Survey 2025-26, tabled in Parliament by Union Finance Minister Nirmala Sitharaman on January 29, 2026, highlights that the current climate finance levels are inadequate for developing countries to achieve their climate goals. This climate funding gap is not a lack of ambition, rather, is imbibed in the structural weaknesses of the international financial system. 

  1. Climate Finance gap in India and other developing countries

By 2030, developing economies are estimated to need USD 5–6 trillion1 for effective climate action. With that in mind, the following may be noted:

  • Despite global efforts, developing countries continue to face a significant funding gap of around USD 4 trillion annually for sustainable development, as highlighted at the Fourth International Conference on Financing for Development (Compromiso de Sevilla)2.
  • Climate finance in India remains skewed towards only the mature sectors such as solar, wind energy and energy efficiency.
  • Critical areas, including adaptation, financing for micro, small, and medium enterprises (MSMEs), urban infrastructure, and hard-to-abate industries, remain underfunded.

1.1.  Challenges in mobilising private capital for climate finance 

In 2023, global financial assets under management totalled USD 1.9 trillion, with private capital accounting for nearly USD 1.3 trillion3. Most of this private capital went to advanced economies, with China receiving another 30%, whereas other developing countries, excluding China, received merely around 15%. The reasons for such a gap include: 

  • Developing countries, being more vulnerable to climate change, face higher borrowing costs owing to currency volatility, lower sovereign credit ratings, and financial systems that lack depth.
  • Most of the abundant global capital flows to developed economies with stronger financial markets and economies that pose minimal risks. 
  • Investors often hesitate to finance climate resilience projects in developing countries.
  1. Policy Initiatives towards bridging the Finance Gap 

While the overall progress of the country towards the climate goals remain insufficient4, India has, over years, through policy initiatives and regulatory reforms, have mobilised climate finance to the extent that has  resulted in a 36% reduction in emissions intensity since 2005 and achieved 50% non-fossil power capacity ahead of schedule. The policy initiatives taken include the following:

  • Allowing 100% foreign direct investment in renewable energy projects.
  • Implementing SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework, green bond guidelines. [Refer to our BRSR resource centre]
  • Provision of credit lines and financing for climate-related investments by Development finance institutions in India, including IREDA, NABARD, SIDBI, PFC, and REC.
  • Issuance of Sovereign Green Bonds to fund low-carbon public infrastructure, providing policy signalling and market benchmarks. [Refer to our article on SGBs here]
  • Introduction of green deposit framework by RBI that optimises the flow of credit to green activities/projects by channelising institutional and household savings, with guardrails in place to overcome greenwashing challenges. [Refer to our article on green deposits here]
  • Incorporating risk mitigation, reconstruction, and recovery, as well as prevention, under the State Disaster Mitigation Fund (SDMF) and the National Disaster Mitigation Fund (NDMF), institutionalised as part of the Disaster Management Act 2005.
  • Implementation of Glacial Lake Outburst Flood Mitigation Programme approved under NDMF to monitor glaciers and glacial lakes in the Indian Himalayan region.

2.1. Bridging the gap domestically

Currently, around 83 per cent of India’s finance for mitigation and 98 per cent of finance for adaptation is sourced domestically, reflecting strong internal financing. While relying solely on domestic resources is insufficient to meet India’s overall climate investment needs, some steps towards strengthening the domestic financial system may include: 

  • Issuing municipal green bonds can unlock USD 2.5–6.9 billion for local bodies driven climate action over the next 5–10 years. 
  • Strengthening the financial ecosystem through the mobilisation of blended finance, de-risking of projects, and capacity building through technical assistance and training through specialised development finance institutions like IREDA, NABARD, SIDBI, PFC, and REC can play a critical role in advancing India’s climate finance landscape by supporting low-carbon and renewable energy projects.
  • Extending insurance coverage to safeguard people against economic losses associated with the physical risks of climate change, and improving the creditworthiness of climate-exposed borrowers such as farmers and MSMEs.

Conclusion

There is a wide disparity between the climate vulnerability and the funds available towards supporting the climate action. While policy incentives are being shaped towards mobilising domestic finance, an effective global response is required, particularly towards the developing countries. The global capital allocation needs to be mobilised towards areas where the investment needs for sustainable development are most pressing.

See our other resources:

  1. Microfinance and NBFC-MFIs in Economic Survey 2026
  2. Economic Survey 2026: Key Insights on Infrastructure Financing
  3. Resources on Sustainability Finance
  4. Resource Center on ESG and sustainability
  1. UNFCCC (2024, September 10). Second report on the determination of the needs of developing country Parties related to implementing the Convention and the Paris Agreement: https://unfccc.int/documents/64075 ↩︎
  2. UNDESA. Sevilla Commitment Fourth International Conference on Financing for Development: https://financing.desa.un.org/sites/default/files/2025-11/FFD4%20Outcome%20Booklet%20v5_EN_Digital%205.5×8.5.pdf ↩︎
  3. Climate Policy Initiative. 2025. Global Landscape of Climate Finance 2025: https://www.climatepolicyinitiative.org/wp-content/uploads/2000/06/compressed_Global-Landscape-of-Climate-Finance-2025.pdf
    ↩︎
  4. https://climateactiontracker.org/countries/india/net-zero-targets/ ↩︎

From Capital Assets to Stock-in-Trade: Taxing “Notional” Gains in Amalgamations

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Decoding Supreme Court ruling in Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi

– Sourish Kundu | corplaw@vinodkothari.com

One of the most common modes of corporate restructuring is merger, and one of the most crucial aspects in assessing the commercial viability of a proposed merger is its tax implications. Typically, in a merger, the shareholders of the transferor company are issued shares of the transferee company in order to avail the exemption under section 70(1)(f) of the IT Act, 2025 [corresponding to section 47(vii) of the IT Act, 1961]. The said provision grants exemption in case of scheme of amalgamation in respect of the transfer of a capital asset, being shares held by a shareholder in the transferor company, where (i) the transfer is made in consideration of the allotment of shares in the transferee company (other than where the shareholder itself is the transferee company) and (ii) the amalgamated company is an Indian company.

However, a recent Supreme Court ruling in the matter of Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi [2026 INSC 46] has opened a new avenue for debate w.r.t the taxation on receipt of shares of the transferee company in a scheme of amalgamation. In this case, the Supreme Court ruled that the exemption as provided under section 47(vii) of the IT Act, 1961 [corresponding to section 70(1)(f) of the IT Act, 2025] shall not be available to shareholders of the transferor company who are not perceived as “investors”, that is to say long term investors as opposed to traders, in the transferor company. And accordingly, any notional gain in a share swap deal pursuant to an amalgamation shall be taxed u/2 28 of the IT Act, 1961 [corresponding to section 26 of the IT Act, 2025].

In this article, we decode the nuances of the ruling, the impact it is expected to have in the sphere of merger deals and other related concerns.

Difference between capital and business assets

So far, the common understanding of consideration in case of amalgamations was that an amalgamation is merely a statutory replacement of one scrip for another, with no real “transfer” or “income” until the new shares are actually sold for cash, or in other words, mere substitution of shares in the books of the involved entities. However, the Apex Court in the instant judgement has now effectively set a different precedent for those holding shares as stock-in-trade, i.e. current investments.

The Court clarified that while Section 47(vii) provides a safe harbor for investors (treating mergers as tax-neutral corporate restructuring), this exemption does not extend to “business assets”, a.k.a. stock in trade. For a trader and investment houses, shares held in stock-in-trade represent “circulating capital”, and the objective of holding them is not capital appreciation, but conversion into money in the ordinary course of business. Therefore, replacing shares of an amalgamating company with those of an amalgamated company of a higher, ascertainable value constitutes a “commercial realisation in kind”.

The 3 pillar test for taxability

The SC applying the doctrine of real income emphasised in Commissioner of Income-Tax v. Excel Industries Ltd. and Anr. [(2013) 358 ITR 295 (SC)], established a three-pillar test, which is to be applied on a case to case basis to determine if allotment of shares pursuant to a merger triggers taxation of business income u/s 28 of the IT Act, 1961: 

  1. Cessation of the Old Asset: The original shares must be extinguished in the books of the assessee.
  2. Definite Valuation: The new shares must have an ascertainable market value.
  3. Present Realisability: The shareholder must be in a position to immediately dispose of the shares and realise money.

This test was further elaborated by two situations viz. allotted shares being subject to a statutory lock-in, which hinders the disposability of the asset, and allotted shares being unlisted, which cannot be said to be realisable, since no open market exists to ascribe a fair disposal value.

Additionally, the SC also held that the trigger is the date of allotment of the shares of the amalgamated entity, and neither the “appointed date” nor the “date of court sanction” or what is called as “effective date” in the general parlance, as no tradable asset exists in the shareholder’s hands until the scrips are actually issued.

Critical Concerns

While the ruling provides reasonable clarity on the treatment of shares received as a result of amalgamation, when the same is held in inventory, it leaves several operational questions unanswered, leaving a gap to determine the commercial feasibility of these deals.

  1. Treatment of profits and losses alike

If the Revenue can tax “notional” gains arising from a higher market value at allotment, correspondingly assessees should be allowed to book notional losses, if any on such deals as well. In cases where a merger swap ratio or a market dip results in the new shares being worth less than the cost of the original holding, the taxpayer should, by the same logic, be entitled to claim a business loss u/s 28 of the IT Act, 1961, or in other words, if the substitution is a “realisation” for profit, it must be a “realisation” for loss as well.

  1. Increase in cost of acquisition

A major concern is the potential for double taxation. If the assessee is taxed on notional gain, being the difference between the cost of acquisition of the original shares and the FMV of the shares of the transferee company on the date of allotment, such FMV should logically become the new cost of acquisition. If an assessee is taxed on the difference between the book value and the FMV at the time of allotment, but the increased cost of acquisition is not allowed, the same appreciation gets taxed twice. It is first taxed as business income at the time of allotment and again at the time of the actual sale.  

  1. Determination of the nature of shares as “stock in trade” vs “capital asset”

This issue remains prone to litigation, that is, who determines the nature of the investment, whether it is current or non-current? Will it be determined basis the books of account of the investor? 

A CBDT circular lays down certain principles along with some case laws to distinguish between shares held as stock-in-trade and shares held as investments, and decide the treatment of shares held by the investing company. Further, factors such as intention of the party purchasing the shares, [discussed by Lord Reid in J. Harrison (Watford) Ltd. v. Griffiths (H.M. Inspector of Taxes); (1962) 40 TC 281 (HL)], and method of recording the investments [highlighted in CIT v. Associated Industrial Development Co (P) Ltd (AIR1972SC445)], are considered as the deciding factors for making a demarcation between treating an asset as capital asset or stock-in-trade.

As highlighted in the instant case, while the initial classification is made by the companies in the financial statements, the AO is empowered to overlook the same, and determine whether the shares were held as stock-in-trade or as capital assets, as without that determination, the taxability or eligibility for exemption u/s 47 could not be ascertained.

It should be noted that the line between a long-term strategic investment and a trading asset is often thin, and the Jindal ruling places the burden on the Revenue to prove the stock status and the “present realisability” of the shares.

Conclusion

Proving by contradiction, the Apex Court has added that: “If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion. Enterprises could create shell entities, warehouse trading stock or unrealised profits therein, and then amalgamate so as to convert them into new shares without ever subjecting the commercial gain to tax. Equally, losses could be engineered and shifted across entities to depress taxable income. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus; to exempt them from charge at the point of substitution would undermine the integrity of the tax base”

Discussing the concept of “transfer”, “exchange” and “realisability”, the SC has affirmed that mergers do not entail a mere replacement of shares of one company with that of another, as for persons holding the same as stock-in-trade cannot be said to be a continue their investment, instead the new shares being capable of commercial realisation gives rise to taxable business income. The Jindal Equipment ruling seems to effectively end the assumption of automatic tax neutrality for all merger participants, subject to fulfillment of applicable conditions prescribed in the IT Act. As a result, if the tax officers believe that the shareholders hold the shares as stock in trade, and could cash out the same at the next possible instance, the assessee shall be under the obligation to pay tax even without encashing any gain in actuals. Further, the tax implications in such cases shall not be at the special rates prescribed for capital gains.

Read more:

Understanding “Undertaking” in the Context of Investment Demergers

Budget 2025: Mergers not to be used for evergreening of losses

Related Party Lending: RBI rules for foreign banks

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– Aparajita Das, Executive | corplaw@vinodkothari.com

The recently issued RBI (Commercial Banks – Credit Risk Management) Amendment Directions, 2026 has revised and consolidated the regulatory framework governing lending to related parties. The revised framework strengthens governance standards, expands the scope of “related parties”, and introduces enhanced approval, monitoring, and disclosure requirements. The amendments have been discussed briefly in our article here (for commercial banks) and here (for NBFCs). 

Section 20 of the Banking Regulation Act, 1949 places a statutory prohibition on lending to directors and entities in which directors are interested, to prevent conflict of interest, self-dealing, and misuse of depositor funds. Pursuant to clause (a) of Explanation to sub-section (4) thereof, Para 15A has been issued under the CRM Directions to clarify how these restrictions apply in the context of foreign banks operating in India through branches. Prior to the Amendment Directions, the same was specified in Para 15(2) of the erstwhile CRM Directions. 

The RBI has clarified that foreign banks cannot circumvent Section 20 merely because the Board is located outside India. The regulatory intent is to ensure functional and ethical parity between Indian banks and foreign bank branches operating in India, particularly in relation to related party exposure.

Applicability of Restrictions to Foreign Bank Branches, Officers, Boards and Foreign / Indian Entities 

 1.  Regulatory Background 

Related party lending by banks in India is primarily governed by section 20 of the Banking Regulation Act, 1949. 

Section 20(1) of the Act imposes statutory prohibition on banks from granting loans or advances to:

  1.  any of its directors;
  2. any firm in which a director is interested as partner, manager, employee or guarantor;
  3. any company (other than permitted exceptions) in which a director holds substantial interest or is interested as director, managing agent, manager, employee or guarantor; and
  4. any individual in respect of whom a director is a partner or guarantor.

The said provisions are mandatory and prohibitory in nature and are intended to prevent conflicts of interest and misuse of fiduciary position.

2. Applicability to Foreign Banks in India – Para 15A(1) of CRM Directions 

Para 15A, issued in pursuance of clause (a) of the Explanation to Section 20(4) of the BR Act, provides that the sanction or grant of credit facilities to companies in India by a foreign bank having branches in India shall be in compliance with the spirit of Section 20 of the Banking Regulation Act, 1949.

Accordingly, an Indian branch of a foreign bank shall not lend to any firm or company in India if: 

  1. A Director on the Board of the foreign bank abroad has an interest in such firm or company;or
  2. The company is a subsidiary of an Indian or foreign parent entity in which such Director is interested.

RBI in its direction has explicitly stated –

  1. That a Director sitting on the foreign bank’s Board outside India is treated at par with a director of an Indian bank, for the purposes of Section 20.
  2. That the location of the Board (abroad) or the incorporation of the bank outside India does not dilute the applicability of lending restrictions.

Therefore, Indian branches cannot claim regulatory insulation by arguing that the Director is not involved in Indian operations.

3. Exceptions and Permissible Transactions

The Directions provide limited and narrowly construed exceptions which includes:

  1. Credit facilities granted prior to appointment of the Director, subject to no renewal, modification or enhancement till the conflict ceases;
  2. Loan against own deposits, government securities or life insurance policies within the prescribed loans to value norms.
  3. Personal loans to Directors provided to other employees as a part of the Policy or forming part of approved compensation  package of such director.
  4. Advances to public trust where trustee is also a Director of the Lending Bank. 

4. Application to Officers and Specified Employees of Foreign Banks

Although Para 15A directly addresses directors, its effect extends to officers and senior management of foreign bank branches in the following manner:

  1. Officers cannot sanction or process lending proposals that would violate Section 20 as clarified by Para 15A.
  2. Internal delegation or operational autonomy does not override statutory prohibitions.

Further, under the Related Party Lending framework (Chapter V), officers classified as specified employees are subject to disclosure obligations, recusal from decision-making, arms-length pricing and approval norms as per the Credit Policy of the bank.

5. Application to Board of Directors of Foreign Bank (Abroad)

Para 15A squarely applies where a Director of the Foreign Bank abroad has substantial interest, control, directorship, promoter position or guarantee obligation in regard to the Indian Borrower Entity. In such a case, the Indian branch must treat the borrower as prohibited even if the lending transaction has taken place in India. The foreign Director has no role in the Indian branch.

The restriction extends to Indian subsidiaries of foreign holding companies, step down subsidiaries and group entities where foreign Director has any indirect interest.   

6. Application to Indian Entities

Indian entities are covered if a Foreign Bank’s Director has interest or control or if the entity is a subsidiary of any other Indian or foreign entity in which such Director is interested. However, the prohibition still applies, irrespective of the Indian entity being listed or unlisted or fund lending being fund based or non-fund based.

7. Application to Foreign Entities 

Similarly, on account of Para 15A, foreign persons and entities may also be treated as related parties due to control, shareholding, or board nomination rights where lending to foreign entities is otherwise permissible, materiality thresholds, Board/Committee approvals, and recusal norms shall apply and any structure designed to circumvent Para 15A through offshore routing may be treated as regulatory evasion.

8. Conclusion  

The norms clearly provide that the foreign banks must also follow regulatory requirements on conflict of interest specified in the BR Act read with CRM Directions. Thus, the Indian branches of foreign banks must carefully check the interests of overseas board members, and loan decisions must look at governance issues as well as normal credit risk. If these rules are not followed, the bank may face regulatory action, fines, and disciplinary action against staff.

Therefore, Para 15A makes sure that foreign bank branches in India follow the same ethical and safety standards as Indian banks. It stops foreign directors from indirectly giving benefits to themselves and protects the trust and stability of the Indian banking system. These rules apply broadly to foreign bank branches, their officers, overseas boards, and both Indian and foreign entities, based on who has interest, control, or influence and not on where they are located.

Our other resources:

  1. Lending to your own: RBI Amendment Directions on Loans to Related Parties
  2. Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting

Shastrarth 26 – Loans to related parties by banks and NBFCs

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In this edition of Shastratha, we deliberate on the regulatory framework, key concerns, and practical considerations relating to loans to related parties by banks and NBFCs, including governance expectations, prudential limits, and recent regulatory developments impacting such transactions.

Shastrarth can be viewed here – https://youtube.com/live/o87BhAcZPio

Our other resources on the subject:

https://vinodkothari.com/2026/01/rbi-brings-revised-norms-on-related-party-lending-and-contracting/

https://vinodkothari.com/2026/01/lending-to-your-own-rbi-amendment-directions-on-loans-to-related-parties/

PPT for Shastrarth:

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