From Capital Assets to Stock-in-Trade: Taxing “Notional” Gains in Amalgamations
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:
- Cessation of the Old Asset: The original shares must be extinguished in the books of the assessee.
- Definite Valuation: The new shares must have an ascertainable market value.
- 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.
- 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.
- 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.
- 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
– 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:
- any of its directors;
- any firm in which a director is interested as partner, manager, employee or guarantor;
- 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
- 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:
- A Director on the Board of the foreign bank abroad has an interest in such firm or company;or
- 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 –
- 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.
- 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:
- Credit facilities granted prior to appointment of the Director, subject to no renewal, modification or enhancement till the conflict ceases;
- Loan against own deposits, government securities or life insurance policies within the prescribed loans to value norms.
- Personal loans to Directors provided to other employees as a part of the Policy or forming part of approved compensation package of such director.
- 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:
- Officers cannot sanction or process lending proposals that would violate Section 20 as clarified by Para 15A.
- 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:
Shastrarth 26 – Loans to related parties by banks and NBFCs
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/
PPT for Shastrarth:
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Open in new tab Lending to your own: RBI Amendment Directions on Loans to Related Parties
-Team Finserv | finserv@vinodkothari.com
On January 5, 2026, the RBI issued the Amendment Directions on Lending to Related Parties by Regulated Entities. Pursuant to this, changes were introduced to Reserve Bank of India (Non-Banking Financial Companies – Credit Risk Management) – Amendment Directions, 2026 (CRM Amendment Directions) and Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, Amendment Directions, 2026. Previously, Draft Directions were also issued on the subject. Our write-up on the draft directions can be accessed here.
Highlights
Applicability and Effective Date
The amendments under CRM Directions shall apply to all NBFCs, including Housing Finance Companies (HFCs) with regard to lending by an NBFC to its ‘related party’ and any contract or arrangement entered into by an NBFC with a ‘related party’. However, Type 1 NBFCs and Core Investment Companies shall not be covered under the applicability.
These amendments shall come into force on 1 April 2026. NBFCs may, however, choose to implement the amendments in their entirety from an earlier date.
In addition to complying with the provisions of the Amendment Directions, listed NBFCs shall continue to adhere to the applicable requirements of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time.
Grandfathering of existing arrangements: Existing RPTs that are not compliant with these amendments may continue until their original maturity. However, such loans, contracts, or credit limits shall not be renewed, reviewed, or extended upon expiry, even where the original agreement provides for renewal or review.
Any enhancement of limits sanctioned prior to 1st April 2026 shall be permitted only if they are fully compliant with these amendments.
Relevant Definitions
Related Party
| RPs under Amendment Directions | Whether covered in the Present Regulations |
| (A) Related Persons: These can be non-corporate | |
| a promoter, or a director, or a KMP of the NBFC or relatives of the said (natural) person | All other persons except the promoter was covered |
| Person holding 5% equity or 5% voting rights, singly or jointly, or relatives of the said (natural) person | No |
| Person having the power to nominate a director through agreement, or relatives of the said (natural) person | No |
| Person exercising control, either singly or jointly, or relatives of the said (natural) person | Yes |
| (B) Related Parties: These can be any person other than individual/HUF, and cover Entities where (A) | Covered Partially |
| is a partner, manager, KMP, director or a promoter | Promoter not covered |
| hold/s 10% of PUSC | Holds lower of (i)10% of PUSC and (ii)₹5 crore in PUSC |
| has single or joint control with another person | Yes |
| controls more than 20% of voting rights | No |
| has power to nominate director on the Board | No |
| are such on the advice direction, or instruction of which the entities are accustomed to act | No |
| is a guarantor/surety | Yes |
| is a trustee or an author or a beneficiary (where entity is a private trust) | No |
| Entities which are related to (A) as subsidiary, parent/holding company, associate or joint venture | Yes |
The definition of “Related Party” remains unchanged from that provided under the Draft Directions.
Further, a clarification have been added where an entity in which a related person has the power to nominate a director solely pursuant to a lending or financing arrangement shall not be regarded as a related party.
Related Person
Under the Draft directions, the definition of a “related person” included group entities. However, pursuant to the Amendment Directions, group entities have been expressly excluded from the scope of “related person.” The provisions are specific for lending to directors, KMPs and their related parties. In the case of lending to entities such as subsidiaries and associates, the NBFC must adhere to the concentration norms as prescribed under the CRM Directions.
Specified Employees
The definition of “Senior Officer” as provided under the erstwhile regulations (Para 4(1)(vii) of the Credit Risk Management Directions) has been omitted and, in its place, the concept of “Specified Employees” has been introduced. “Specified Employees” has been defined to mean all employees of an NBFC who are positioned up to two levels below the Board, along with any other employee specifically designated as such under the NBFC’s internal policy.
Under the erstwhile regulations, the term “Senior Officer” was given the same meaning as defined under Section 178 of the Companies Act, 2013. Thus, the terms Senior Officer included the following:
- Members of the core management team,
- All members of management who are one level below the Executive Directors,
- Functional heads
Practically, this change implies that one additional hierarchical level would now need to be designated as “Specified Employees”. Further, the specific inclusions that earlier applied under the Companies Act and the LODR Regulations i.e., functional heads under the Companies Act and CS and CFO under the LODR will no longer be automatically covered, unless they fall within two levels below the Board or are specifically designated as such under the NBFC’s internal policy.
Meaning of “Lending”
‘Lending’ in the context of related party transactions would include funded as well as non-fund-based credit facilities to related parties. It may further be noted that investments in debt instruments of related parties are specifically included within the ambit of lending. Accordingly, the scope is not just restricted to loans and advances but includes all fund based and non-fund based exposures as well as investment exposures.
Principles to be followed while lending to a related party
While lending to related parties, the following principles and provisions are to be followed by NBFCs:
- Credit Policy
The credit policy of the NBFC must contain specific provisions on lending to RPs. Mandatory contents of such policy will include:
- Definition of RPs and Specified Employees
- Safeguards to address the risks emanating from lending to related parties
- Provisions relating to lending to ‘specified officers’ of the NBFC and their relatives
- Provisions related to a suitable whistleblower mechanism for employees to raise concerns over irregular and unethical loans to RPs. Any kind of quid pro quo arrangements should also be prohibited.
- Materiality Thresholds for sanctioning of the loans
- Interested parties to recuse themselves
- Limits for lending to RPs, including sub-limits for lending to a single related party and a group of related parties
- Monitoring mechanism for such loans to RPs. This would include the designation of a specified authority for monitoring as well as reporting to the Board/Board committee. Further, procedure in case of deviation from the policy must also be prescribed.
Earlier, the policy requirement was specifically applicable in case of base layer NBFCs, but now the same has been made applicable for all NBFCs.
- Board approved limits for lending to RPs
The CRM Amendment Directions also mandate prescribing board-approved limits for lending to RPs. Further, sub-limits will also have to be prescribed for lending to a single RP and a group of RPs. Here, a question may arise on what basis will the NBFC prescribe such limits? Such limits may be prescribed after considering the ticket size of the loans generally offered by the Company, to ensure the loans to RPs are aligned with the loan products for general customers. The limit may be specified as a percentage of the NOF of the NBFC, similar to the credit concentration limits.
- Materiality Thresholds
NBFCs may extend credit facilities to related parties in accordance with their Board-approved credit policy. Any such lending must be within the board-approved limit prescribed for lending to RPs (including a single RP and a group of RPs).
Further, under the Amendment Directions (Para 13G of the CRM Amendment Directions), RBI has now clearly laid down materiality thresholds for such lending to related parties, including those to directors, senior officers, and their relatives. Lending above the prescribed materiality threshold should be sanctioned by the Board/Board Committee of the NBFC. (other than the Audit Committee).
It may be noted that earlier, for middle and upper layer NBFCs, any loans aggregating to ₹ 5 Crore and above were to be sanctioned by the Board/Board Committee. The materiality thresholds prescribed under the Amendment Directions are based on the layer of the NBFC, as follows:
| Category of NBFCs | Materiality Threshold |
| Upper Layer and Top Layer | ₹10 crore |
| Middle Layer | ₹5 crore |
| Base Layer | ₹1 crore |
| Layer of the NBFC shall be based on the last audited balance sheet.For loans, materiality threshold shall apply at individual transaction level | |
Can the power to sanction loans be delegated to the Audit Committee?
The CRM Amendment Directions have defined the Committee on lending to related parties which will mean a committee of the Board of the NBFC entrusted with sanctioning of loans to related parties. NBFCs may also identify any existing Committee, other than the Audit Committee, for this purpose.
Further, para 13I provides that,
However, a NBFC at its discretion, may delegate the above powers of lending beyond the materiality threshold to a Committee of the Board (hereafter called Committee) other than the Audit Committee of the Board
Accordingly, on a reading of the above, it seems that the power to sanction loans cannot be provided to the Audit Committee of the Board.
- Monitoring and Reporting Mechanism
- NBFC shall maintain and periodically update the list of all related persons, related parties, and loans sanctioned to them. This will be in addition to the list of related parties of the NBFC, which comes from the Companies Act, 2013, LODR and Accounting Standards.
- The list shall be reviewed at regular intervals to ensure accuracy and compliance.
- Credit facilities sanctioned to specified employees and their relatives shall be reported to the Board annually.
- Any deviation from the lending policy on related parties, along with reasons, shall be reported to the Audit Committee or to the Board where no Audit Committee exists.
- Products/structures circumventing these Directions (reciprocal lending, quid pro quo) shall be treated as related party lending.
5. Quid Pro Quo Arrangements
The CRM amendment directions also provide that any arrangements which aim at circumventing the Amendment Directions will be treated as lending to RPs. Accordingly, any such arrangements involving reciprocal lending to related parties shall be subject to all the provisions of this direction.
- Refrain from participation
Para 13J requires that Directors, KMPs and specified employees must recuse themselves from any deliberations or decision-making on loan proposals, contracts or arrangements that involve themselves or their related parties. This obligation also applies to all subsequent decisions involving material changes to such loans, including one-time settlements, write-offs, waivers, enforcement of security and implementation of resolution plans, to ensure independence and avoid conflicts of interest.
Financial Statements Disclosures
Details of exposure to related parties as per these Directions shall be disclosed in the Notes To Accounts pursuant to para 21(9A) of the Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, 2025 in the following format:
| (Amt in ₹ Crore) | |||
| Sr. No | Particulars | Previous Year | Current Year |
| Loans to Related Parties | |||
| 1 | Aggregate value of loans sanctioned to related parties during the year | ||
| 2 | Aggregate value of outstanding loans to related parties as on 31st March | ||
| 3 | Aggregate value of outstanding loans to related parties as a proportion of total credit exposure as on 31st March | ||
| 4 | Aggregate value of outstanding loans to related parties which are categorized as: | ||
| (i) Special Mention Accounts as on 31st March | |||
| (ii) Non-Performing Assets as on 31st March | |||
| 5 | Amount of provisions held in respect of loans to related parties as on 31st March | ||
| Contracts and Arrangements involving Related Parties | |||
| 6 | Aggregate value of contracts and arrangements awarded to related parties during the year | ||
| 7 | Aggregate value of outstanding contracts and arrangements involving related parties as on 31st March | ||
Comparison at a Glance
| Parameters | Existing Guidelines | Amendment Directions |
| Applicability | NBFC-BL- only policy requirement was prescribedNBFC-ML and above – threshold, approval and reporting was applicable | NBFCs in all layers, except Type 1 and CICs |
| Materiality Threshold/ Threshold for seeking board approval | NBFCs-BL- As per the PolicyNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 5 crore | NBFCs-BL- Rs. 1 croreNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 10 crore. Lending beyond the MT requires board or board committee approval (other than AC). |
| Board approved limits for lending to RPs | No such limit was required to be prescribed | Policy shall specify aggregate limits for loans towards related parties. Within this aggregate limit, there shall be sub-limits for loans to a single relatedparty and a group of related parties.Lending beyond the board approved limit, requires ratification by the Board/AC. |
| Monitoring | Loans and Advances to Directors less than ₹5 crores shall be reported to the Board. Further, all loans and advances to senior officers shall be reported to the Board. | Para 13K: Maintain and periodically update list of related persons, related parties, and loans to them. Para 13L: Annually report credit facilities to specified employees and relatives to the Board. Para 13M: Quarterly or shorter internal audit reviews on adherence to related party guidelines. Para 13N: Report deviations and reasons to the Audit Committee or Board. Para 13O: Products/structures circumventing Directions (reciprocal lending, quid pro quo) shall be treated as related party lending. |
| Policy Requirement | Only for NBFC-BL. NBFCs were required to prescribe a threshold beyond which the loans shall be required to be reported to the Board | Applicable for all NBFCs. |
| Recusal by interested parties | Directors who are directly or indirectly concerned or interested in any proposal should disclose the nature of their interest to the Board when any such proposal is discussed | Interested parties, including specified employees to recuse themselves |
| Disclosure under FS | Related Party Disclosure were specified as per format prescribed under Para 21(9) of Financial Statement Disclosures Directions | In addition to the earlier requirement, another format has been prescribed under Para 21(9A) with respect to details of exposures to related parties |
| Power to sanction loans to RPs | For NBFCs-BL: Only reporting is required; no board approval For NBFCs-ML and above: Board approval required for loans above the threshold. | For all NBFCs:Loans above materiality threshold shall be sanctioned by Board or delegated Committee (not Audit Committee) Loans below the threshold shall be sanctioned by appropriate authority as defined under the Policy. |
Our Other Resources:
Regulatory Round up of year 2025
Access the Youtube video at https://youtu.be/BvxD1reIJoc
Partly Paid Shares – Whether Doppelganger of Share Warrants?
– Pammy Jaiswal and Saket Kejriwal | corplaw@vinodkothari.com
Background
In recent times, the use of partly-paid shares has seen some traction[1] where several listed companies[2] came up with issuance of partly-paid shares[3]. While the law provides for the issuance of partly-paid securities, it is important to understand how this instrument has not been used merely as a capital-structuring tool, but arguably, as a regulatory workaround. An analogy may be drawn to a situation where a customer is allowed to purchase a valuable by paying a token money today and pay the full consideration after a period of say 1-2 years at the same price which prevailed at the time of payment of token money. Specifically, promoters and investors appear to be utilizing partly-paid shares as a substitute for share warrants, by paying a minuscule part of the value of shares as a part of application money and the balance payment is allowed to be made at any time in the future, sometimes after an unreasonably long time.
In this article, we argue that the issue of such partly-paid shares is as good as issuing share warrants, However, circumventing the challenges associated with warrants.
Fundamentals of Share Warrants
Ashare warrant is a security issued by a company that grants its holder the right/option to subscribe to equity shares of the company (i.e. Future Equity) at a predetermined price, within a predetermined period, upon the upfront payment of a token amount referred to as the option premium.
Legal Context
A share warrant, being marketable in nature, provides a right in securities, therefore, it is treated as a security under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Some of the relevant legal provisions would include:
- Sections 42, 62 and other relevant provisions of the Companies Act, 2013; and
- The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Key Features
- Right to Decide: A share warrant allows an investor to subscribe to the company’s equity shares in the future, typically at a price lower than the anticipated market price at the time of exercise. Conversely, if the market price at the time of exercise falls below the pre‑determined price, the investor may choose not to subscribe, thereby limiting their loss to the option premium paid (i.e., the upfront cost), rather than incurring the full loss arising from the difference between the initial/subscription value and the reduced market price.
- Option Premium: The upfront amount paid for obtaining this right is called the option premium i.e. if the current market value of shares is Rs.100, then the issuer may issue equity shares immediately at Rs.100, or Issue a share warrant where the investor pays Rs. 10 upfront for the right to subscribe the equity at Rs. 100 in the future. If, at the time of exercise, the market price of the share has risen to Rs. 120, the investor benefits from locking the price at Rs. 100, making the Rs. 10 upfront cost worthwhile. Conversely, if the market price falls to Rs. 50, the investor may choose not to exercise the warrant, limiting the loss to Rs. 10 i.e. option premium. This forms a part of the net worth of the company. For details on option pricing, may refer to our resource on Option Pricing Model.
- Forfeiture: If the warrant holder chooses not to exercise the right, the upfront option premium is forfeited.
Pricing
The value of option premium is generally determined by Black Scholes Model, Binomial Options Pricing Model or Monte Carlo Simulation Method. The most appropriate method for calculation of option premium, in the context of companies using warrants as a regulatory workaround, is the Simulation Method.
One of the key features of share warrants is that the longer the life of the option, there is a higher probability of its price being high. In accordance with the above models, issuing share warrants for an extended period can raise the option premium to a point where it becomes undesirable. Therefore, it is recommended that the life of a warrant should be just and reasonable, and that it should not be used as a substitute for long‑term convertible instruments such as OCDs, CCDs, CCPS, or other similar securities.
Difference between warrants and partly-paid up shares
While both partly‑paid shares and warrants involve an upfront payment towards a future right in equity shares, they differ significantly on the following points:
| Basis of Difference | Partly-Paid Shares | Share Warrants |
| Right and Obligation | Holder is obligated to pay the remaining call money when demanded by the company. Failure to pay will lead to forfeiture of the subscription and call money received by the company. | Holder has a right, but not an obligation, to subscribe to equity shares at a future date. |
| Nature of Investment | These are equity shares issued with part of the value paid upfront, making the holder a shareholder of the company. | These are options issued for a premium, entitling the holder to subscribe for equity shares in the future. |
| Valuation | Shares are subscribed at fair value computed as on the date of making the first subscription/ call money | Shares are subscribed at current fair value on a future date along with payment of option premium |
| Shareholder Rights | Partly-paid equity shareholders enjoy rights proportionate to their paid-up amount. | No rights until conversion. |
Why are partly-paid shares doppelgangers ?
Partly-paid shares in its usual nature when used for capital needs in tranches serves the permitted purpose for this concept was introduced, however, this benefit becomes a governance concern when it is used as an alternative to share warrants and as evident from the table above, the two differ in various aspects. The primary reason for this mirroring lies in valuation. In the case of share warrants issued with a longer tenor, the cost of the warrant, representing the right to subscribe to future equity, tends to be higher when calculated using fair value methods, making this option impractical. As an alternative, many companies have opted to issue partly-paid shares, allowing an investor to pay only a minimal upfront amount (similar to the option premium in the case of a warrant) as part of the application money and reserving the right with the investor to infuse the remaining funds for a longer period like 5-10 years which would not be possible in case of warrants as the premium will increase drastically, if calculated as per fair value methods.
Token money to secure allotment of shares
It is imperative to note that in case of share warrants, the price paid upfront is the option premium which is basically the price paid to get the equity at the current value at the future date as against in case of partly-paid shares, where the investor becomes a shareholder on the first payment date by even paying a nominal part amount reflecting the fair value (consisting of part face value and proportionate premium) as on the date of making such first payment. The catch lies in the fact that there is no legal prescription on the maximum time within which a company needs to make the final call on such partly-paid shares (except in case of IPOs) which in case of warrants runs up to 18 months for listed securities as well as size of the calls which in the case of listed companies requires at least 25% of the consideration amount calculated as per the formula for exercise price[4] with reference date being the record date shall be received at the time of option premium.
One may argue that, given the fundamental difference between the two instruments is that one comes with a right (warrants) and the other with the security (partly-paid shares), they can not be used as substitutes as in case of partly-paid shares the right to call money lies with the Board and the investor is obligated to pay on demand, failing which shares may be forfeited, resulting in the loss of upfront amount paid.
On the other hand, a share warrant gives a right to the investor to decide when, or even if, to make the payment. If the investor chooses not to exercise the option, the upfront money paid is still forfeited, with the key difference being that the loss occurs at the investor’s discretion.
The above argument is valid theoretically. However, in practice, this mirroring is frequently used by start‑ups, which are generally incorporated as private companies. In such cases, although the ‘right to call money’ rests with the Board of Directors, the Board itself typically comprises the promoters i.e. the very investors who subscribe to these mirrored partly-paid shares or in the case of external investors/subscribers, their appointed representatives form an integral part of the Board. As a result, the obligation on the subscriber to pay the balance can, in reality, be viewed more as a right, given that it is exercised by a Board largely aligned with the interests of the investors themselves.
Additionally, partly-paid shares provide several benefits to the investor, like proprietary rights, chances to book profits in case of transfer, etc.We have discussed the same below:
Proprietary interest of partly-paid shares
Partly-paid shares are not merely rights in equity shares but allotment of the shares itself. Once an investor pays the subscription money/ first call, the shares are allotted to the investor who becomes a shareholder immediately and gets ownership rights from day one. Having said that, while the benefits arising out of such ownership is proportional to the amount paid up on the shares, it still dilutes the stake of the other investors who hold fully paid up shares.
The investor’s economic risk is lower compared to a fully paid-up shareholder since only part of the share price has been paid, the investor’s capital at risk is limited to the amount actually contributed, while the ownership position in the company already stands created.
Chance to book profits by transfer of partly-paid shares
If an investor who has paid only a nominal amount intends to sell such shares for reasons like liquidity or apprehension of the investee not doing well for some reason, he stands a chance to make profits on the part payment where the fair value of such shares have appreciated at the time of such transfer. A purchaser can acquire ownership interest by paying only the fair value of the amount paid-up, while the remaining payment is effectively locked in at the historical fair value. This allows the investor to benefit from future upside without proportionately funding the company at the prevailing fair value for the unpaid portion, which remains priced at the value as on the date of issuance.
Imagine a situation where Mr. A invests in the partly-paid up equity shares of XYZ Ltd. The fair value of the equity shares is say INR 150 (face value INR 10) where Mr. A invests only INR 30 as paid up amount. Thereafter he decides to sell these partly-paid shares to another investor after 2 years by which time the balance amount is still uncalled. The transfer of these partly-paid shares would be done at a fair value where lets assume the value of the shares have appreciated and as a consideration, Mr. A receives INR 80 as the sale consideration and also passes on the legacy of holding partly-paid shares to the buyer.
However, this issue does not arise in listed companies, where market mechanisms ensure fair price discovery.
An Ideal partly-paid share
Situation where a partly-paid share shall not be considered as a share warrant
In our view, partly‑paid shares should be supported by a concrete plan or blueprint specifying when the call money is expected to be raised along with its purpose. This includes:
- A defined timeline for making the call on unpaid money;
- A specific purpose for which the call money will be used; and
- An upfront subscription amount that is significant and reflects commitment, rather than being a token.
Even if an exact date cannot be determined, it is advisable to link the call to milestones/events ,such as regulatory approvals, project launches, or specific capital needs, rather than leaving it open-ended. This approach distinguishes a legitimate capital-raising intent from doppelganger design of warrants.
Situation where a partly-paid share shall be considered as a share warrant
A partly-paid share may raise regulatory concerns when above conditions do not exist. This includes situations where the initial application amount is nominal, resulting in minuscule capital infusion. Additionally, if the call structure is vague and lacks a defined timeline or commercial justification, it creates ambiguity around the company’s intention to actually raise the remaining capital. The concern is further amplified when the Board of Directors, which holds the discretion to make the call on these partly-paid shares, is influenced or controlled by the very investors who subscribed to these shares. In such scenarios, the obligation to pay the balance amount may become just theoretical.
Conclusion
The intention behind partly-paid shares is to raise capital while allowing the issuer to secure future source of funding, However, when a minuscule amount is paid at the time of subscription of partly-paid shares and the remaining calls are deferred for a long period without any definite /concrete plan, this raises concern as sighted above and from a valuation perspective may not be seen as a partly-paid shares.
[4] Regulation 67 of SEBI ICDR, 2018
Read more:
Share warrants under cloud – are companies not allowed to issue share warrants?
A Guide for AIF Managers on Investor Eligibility and Regulatory Restrictions
Simrat Singh, Senior Executive | finserv@vinodkothari.com
Introduction
An AIF raises capital by issuance of units, which are privately placed. Most AIFs follow a commitment–drawdown model, under which investors agree upfront to commit a specified amount of capital (‘committed capital’). The AIF manager then calls this committed capital, either in full or in tranches, as investment opportunities arise (‘drawdown’). This model helps the AIF to minimise the negative carry that would result from raising investments which are yet to be invested.
This fund-raising process is shaped not only by SEBI’s AIF framework but also by the oversight of the respective sectoral regulators of the relevant investors. AIFs are meant strictly for sophisticated investors, and as such, various categories of AIF investors, such as insurance companies, pension funds, banks and NBFCs, etc. are subject to their respective regulations. When they invest in an AIF, they must comply with SEBI’s rules as well as the investment norms prescribed by their own regulators, each seeking to regulate how the capital of the investor is deployed. In fact, SEBI regulations are agnostic as to who the investor is, hence, most of the SEBI regulations relate to the AIF or the manager, with limited provisions dealing with investors. For example, whether and to what extent an insurance company or a pension fund can invest in an AIF is driven by the guidelines issued by the sectoral regulators such as IRDAI or PFRDA.
In this article, we try to bring together, in one place, the key regulatory norms imposed by various regulators; while these are primarily meant for the investor, however, it will be useful for the AIF managers to keep in mind these restraints while expecting or inviting investments from different categories of investors.
Categories of investors and regulatory restrictions on each category
Minimum investment norms: Common across all categories
- ₹25 crore for investors in Large Value Funds (reduced from ₹ 70 Crore per investor vide SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025) [Reg. 2(1)(pa)];
- ₹1 crore for other investors [Reg 10(c)];
- ₹25 lakh for employees or directors of the AIF, manager, or sponsor [Reg 10(c)];
- No minimum for units issued to employees solely for profit-sharing (and not capital contribution) [Para 4.6 of AIF Master Circular];
- For open-ended AIFs, the initial investment must meet the minimum threshold, and partial redemptions must not reduce the holding below this minimum [Para 4.7 of AIF Master Circular].
Individuals
An AIF may raise funds from individual investors, whether resident, non-resident (NRI), or foreign, through private placement, subject to the following conditions (Refer Reg. 10(a) of AIF Regulations r/w Chapter 4 of AIF Master Circular).
- Foreign investors: A foreign investor must:
- be a resident of a country whose securities market regulator is a signatory to the IOSCO Multilateral MoU (Appendix A) or has a Bilateral MoU with SEBI; or
- be a government or government-related investor from a country approved by the Government of India, even if the above condition is not met.
Additionally, neither the investor nor its beneficial owner1:
- May be listed on the UN Security Council Sanctions List; or
- may be a resident of a country identified by the FATF as having serious AML/CFT deficiencies or insufficient progress in addressing such deficiencies.
If a foreign investor ceases to meet these conditions after admission, the AIF manager must stop making further drawdowns from that investor until compliance is restored.
- Joint Investments: Joint investments, for the purpose of investment of not less than the minimum investment amount in the AIF, are permitted only between:
- an investor and spouse;
- an investor and parent; or
- an investor and child.
A maximum of two persons may invest jointly. Any other combination of joint investors must individually meet the minimum investment threshold. (Refer Reg. 10(c) of AIF Regulations r/w Chapter 4 of AIF Master Circular)
- Terms of Investment: The terms agreed with investors cannot override or go beyond the disclosures in the PPM [Para 4.3 of AIF Master Circular].
- The total number of investors is limited to 1000 investors per scheme; also note that an AIF cannot make a public offer. AIF units are commonly offered through distributors; but even the distributors cannot make an open offer (Please refer to our resource on Dos and Don’ts for AIF Distributors and AIF Managers).
Insurance Companies
- Permissible AIF Categories [Para 1.5 of Investments – Master Circular, 2022 read with IRDAI Circular No. IRDAI/F&I/CIR/INV/074/04/2021 dated 05.04.2021]:
- Category I AIFs: Infrastructure Funds, SME Funds, Venture Capital Funds, and Social Venture Funds (‘Specified Cat I AIFs’);
- Category II AIFs: Only where at least 51% of the corpus is proposed to be invested in infrastructure entities, SMEs, venture capital undertakings, or social venture entities (‘Specified Cat II AIFs’).
- Investment in a Fund of Fund (‘FoF’) is allowed only if such FoF does not directly or indirectly invest funds outside India (Refer Section 27E of Insurance Act, 1938). This is to be ensured by inserting a clause in the Fund offer Documents executed by FoF to restrain such FoF investing into AIFs which invest in overseas companies/funds. Further, investment is not allowed in an AIF which in-turn has an exposure to a FoF in which the insurer already invested. Lastly, no investment in an AIF is allowed which undertakes leverage/borrowing other than to meet operational requirements.
Compliance of conditions laid down in (iii) are to be certified by the concurrent auditor of the insurer and filed along with quarterly periodical returns. Notably, insurance companies are prohibited from investing in Cat III AIFs
- Prohibited Structures: Insurers shall not invest in AIFs that:
- offer variable rights attached to units.
- invest funds outside India either directly or indirectly [s. 27E of Insurance Act, 1938];
- are sponsored by persons forming part of the insurer’s promoter group;
- are managed a manager who is controlled, directly or indirectly, by the insurer or its promoters;
- Investment Limits:
Exposure to any single AIF cannot exceed the lower of 10% of the AIF’s corpus or 20% of the insurer’s total AIF exposure. For Infrastructure Funds, the 10% limit is enhanced to 20%.
Banks and other Regulated Entities (REs)
Banks and other REs may invest in Category I and Category II AIFs, subject to layered limits:
- Bank level: Not more than 10% of the AIF corpus.
- Group level: Up to 20% without RBI approval, and up to 30% with prior RBI approval, subject to capital adequacy and profitability conditions.
- System level: Aggregate investments by all regulated entities cannot exceed 20% of the AIF corpus.
Banks must ensure that AIF investments do not circumvent banking regulations by creating prohibited indirect exposures. Banks are not permitted to invest in Category III AIFs, except for the minimum sponsor contribution where a bank subsidiary sponsors such a fund. For a more detailed discussion on Banks’ investment in AIFs, refer to our resource here.
NBFCs
An NBFC shall not individually contribute more than 10 percent of the corpus of an AIF Scheme. [See Para 8 of RBI ( NBFC – Undertaking of Financial Services) Directions, 2025]. The system-level investment limit of 20% for all REs shall also apply. Notably, unlike banks, NBFCs can invest in Cat III AIFs.
Pension, Provident and Gratuity Funds
Pursuant to a 15 March 2021 notification, non-government Provident Funds, Superannuation Funds, and Gratuity Funds may invest up to 5% of their investible surplus in Specified Cat I AIFs and Specified Cat II AIFs, classified as “Asset Backed, Trust Structured and Miscellaneous Investments”.
Key conditions include:
- Minimum AIF corpus of ₹100 crore;
- Maximum exposure of 10% to a single AIF (not applicable to government-sponsored AIFs);
- Investments restricted to India-based entities only;
- The AIF sponsor and manager must not be part of the fund’s promoter group.
For Government Sector Schemes such as UPS/NPS/NPA Lite/Atal Pension Yojna and Corporate CG schemes, the conditions are the same as above for non-government pension funds.
Mutual Funds
Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 1996. The Seventh Schedule to these regulations sets out the permissible investment universe. Units of AIFs are not included, and accordingly, mutual funds cannot invest in AIF units.
- beneficial owner as determined in terms of sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ↩︎
- The relevant insurance fund would refer to the specific fund of a life insurer from which an investment is made, rather than the insurer’s overall balance sheet. This is because Life insurers maintain separate, ring-fenced funds for different lines of business, such as the life fund, pension fund, annuity fund or ULIP fund and investments must be made out of, and limits calculated with reference to, the particular fund whose money is being deployed. ↩︎
- Investment assets would refer to the total pool of assets held by a general insurer that are available for investment, across all lines of non-life insurance business. Unlike life insurers, general insurers do not maintain separate, ring-fenced policyholder funds for each product. Instead, premiums collected from various non-life insurance policies are invested as a consolidated portfolio, and regulatory investment limits such as exposure to AIFs are calculated with reference to the insurer’s aggregate investment assets shown on its balance sheet. ↩︎
See our other resources on AIFs:
- CIV-ilizing Co-Investments: SEBI’s new framework for Co-investments under AIF Regulations
- Understanding the Governance & Compliance Framework for AIFs
- FAQs on specific due diligence of investors & investments of AIFs;
- RBI bars lenders’ investments in AIFs investing in their borrowers;
- Capital subject to ‘caps’: RBI relaxes norms for investment by REs in AIFs, subject to threshold limits;
- Can CICs invest in AIFs? A Regulatory Paradox;
- Trust, but verify: AIFs cannot be used as regulatory arbitrage;
- 2020 – Year of change for AIFs;
- AIF ail SEBI: Cannot be used for regulatory breach;
RPTs: Understanding the exact nature of Omnibus Approval
– Pammy Jaiswal | corplaw@vinodkothari.com
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