Pursuant to the recommendations of the Expert Committee and as discussed in the SEBI Board meeting held on Sep 30, 2024 and outlined in SEBI Circular dated December 31, 2024, stock exchanges (‘SEs) were mandated to specify the process and timelines for system-driven disclosure (‘SDD’) for any new ratings or revision in ratings. Pursuant to this, NSE and BSE issued their respective circulars specifying the procedural requirements with respect to system-driven disclosures for the ratings (‘SDD Circulars’) on August 1, 2025.
The receipt and/ or change in ESG ratings is a disclosable event in terms of Regulation 30 of the Listing Regulations read with clause (3) of Sch. III.A.A thereof. Hence, a question arises on whether or not the same is also covered by the SDD Circulars, or whether a manual disclosure is still required on receipt/ change of ESG ratings.
What is an ESG rating?
ESG rating is defined under Reg 28B(1)(b) of SEBI (Credit Rating Agencies) Regulations, 1999. To put it simply, an ESG rating is essentially an opinion about (a) either an ‘issuer’ or (b) a security. The ESG ratings provide an opinion on the ESG profile or characteristics, and may either refer to the ESG risks faced by the entity or the impact it may have on the environment and the society, or both.
Subscriber-pays model – wherein ratings are solicited by the subscribers that may include banks, insurance companies, pension funds, or the rated entity itself.
Issuer-pays – wherein the ratings are solicited by the rated entity, in terms of a written contractual agreement between such entity and the rating provider.
Disclosure requirement under Reg 30 of Listing Regulations
Any receipt of rating or revision in existing ESG rating is a ‘deemed material event’ and covered under clause (3) of Sch. III.A.A of Listing Regulations. Since the event emanates from outside the listed entity, such event is required to be disclosed to the SEs within 24 hours of such receipt / information.
Here, the following needs to be noted w.r.t. the disclosure requirements under Reg 30:
Ratings received under both subscriber-pays and issuer-pays model (solicited as well as unsolicited) are required to be disclosed.
Both upward and downward revision in ratings is required to be informed.
Withdrawal of an existing rating is required to be disclosed
Re-affirmation of an existing rating is required to be disclosed as well.
Automation of ESG rating disclosure
The SDD Circulars referred above, are applicable to both credit ratings and ESG ratings. Pursuant to the same, the ERPs are required to report the ESG ratings provided by them to the SEs. The manner of reporting by ERPs has also been provided in the SDD Circular itself. Once reported to the SEs, the ESG rating shall be automatically reflected on the website of the BSE and NSE.
Therefore, since SEs will get the ratings from the ERPs itself, both solicited and unsolicited ratings will be disclosed on the SE platform.
When does this SDD come into effect?
In terms of SDD Circulars, the disclosure of credit and ESG rating has become effective from August 2, 2025.
Actionable for the LEs?
Since the ESG rating shall be consumed by the SEs from the ERPs and auto disseminated on the website, there is no actionable for the LEs in relation to the disclosure of ESG rating under reg 30. However, LEs should monitor whether the ratings provided to them are reflected on SEs. In case any rating is not reported by the ERP, the LE may proactively disclose the same at its end.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2025-11-04 15:47:012025-11-07 13:02:33Disclosure of ESG ratings - automated or still needs manual disclosure?
– Understanding Reportable vs Distributable Profits under Ind AS and the Companies Act, 2013
– Sourish Kundu | corplaw@vinodkothari.com
In the sphere of corporate law intertwined with accounting principles, there arises a question on profits that are reported in the financials of a company and the amount that can actually be distributed, that is to say, a company’s reported profits may be impacted by several accounting standards, yet that does not mean it can distribute all of that profit as dividends. Under Indian law and accounting rules, there is a clear distinction between reportable profits (what appears in the financial statements) and distributable profits (what a company is legally permitted to pay out to shareholders). In this article, we decode the difference between reportable profits and distributable profits and the implications of this difference, whether companies are expected to prepare two statements of profit or loss, how investors are expected to read the financials to ascertain what can be expected as dividend.
What are Reportable Profits?
“Reportable profits” refers to the profits (or loss) shown in the Statement of Profit & Loss prepared under Indian Accounting Standards (Ind AS). It includes all recognised items of income, expenses, gains and losses, whether realised or unrealised, so long as they meet the recognition and measurement rules in terms of the relevant accounting standards. For example, under Ind AS 109 (Financial Instruments), paragraph 5.7.1 states that changes in fair value of financial assets or liabilities measured at fair value through profit or loss (FVTPL) must be recognised in the PnL. Similarly, fair-value measurement principles under Ind AS 113 (Fair Value Measurement) apply where other Ind ASs require or permit fair value.
Because reportable profits include unrealised fair value gains, remeasurements, or other accounting adjustments, there is always a possibility of an inflated or deflated picture being painted wherein there is a difference between a company’s “profit” number from the perspective of distribution.
What are Distributable Profits?
“Distributable profits” are that portion of profits (or reserves) out of which a company can legally declare and pay dividends to its shareholders under the Companies Act, 2013. Section 123(1) of the Act states that a company shall not declare or pay any dividend for a financial year except:
out of the profits of the company for that year, after providing for depreciation, and
out of the profits of any previous financial years, after providing for depreciation and remaining undistributed.
The first proviso to section 123(1) further clarifies that unrealised gains, notional gains or revaluation surplus arising from measurement at fair value shall not be treated as realised profits for the purpose of dividend declaration.
“Provided that in computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded”
Thus, even though accounting standards allow recognition of such gains/losses in the PnL statement, the law restricts their distribution and ensures distribution can be made of only actual realised profits.
As per the section, following adjustments are required to be made to reportable profits to compute distributable profits
Reportable Profits
XXX
Less:
(b) unrealised gains
(XXX)
(c) notional gains
(XXX)
(d) revaluation of assets (positive)
(XXX)
(e) any change in carrying amount of assets (positive) on measurement at FV
(XXX)
(f) any change in carrying amount of liability (reduction) on measurement at FV
Add:
(a) revaluation of assets (negative)
XXX
(b) any change in carrying amount of assets (reduction) on measurement at FV
XXX
(c) any change in carrying amount of liability (increment) on measurement at FV
XXX
Distributable Profits
XXX
So effectively, it is not the case that companies need to maintain or prepare parallel PnL, one for the accounting purpose and one for the purpose of ascertaining distributable profits, the adjustments as illustrated above needs to be carried out. This is similar to adjustments carried out for the purpose of ascertaining profits in terms of Section 198 of the Companies Act, 2013, which is broadly used for determining CSR expenditure and the limits of managerial remuneration. Interestingly, the treatment of fair value changes in assets and liabilities is akin to how it is treated here, that is, fair value gains are not given credit and hence reversed, and on the other hand, fair value losses are not deducted and hence added back to arrive at the figure out of which managerial remuneration is to be paid, or CSR expenditure is required to be made.
Some examples of such fair value changes and their impact on the reportable and distributable profit figures are given below:
Examples:
Consider the following scenarios for company following Ind AS principles of accounting:
Treatment of FVTPL
Date
Particulars
Value
Reportable Profits
Distributable Profits
July, 2024
Acquisition of investment
Rs. 100
–
–
31st March, 2025
Value of investments
Rs. 150
50 (represents fair value gains routed through PnL)
–
January, 2026
Sale of investments
Rs. 200
–
100 (realised gain)
Deferred Tax Asset
Date
Particulars
Value
Reportable Profits
Distributable Profits
July, 2024
Acquisition of investment
Rs. 100
–
–
31st March, 2025
Value of investments
Rs. 70
-30 (represents fair value loss routed through PnL)
–
Deferred tax asset
Rs. 9 (30% tax on Rs. 30)
9
–
January, 2026
Sale of investments
Rs. 90
–
-10
Why the Difference Exists
The divergence arises because accounting standards and company-law provisions serve different purposes:
The Ind AS framework aims to present true and fair information about an entity’s financial performance and position, which includes remeasurements and accounting for fair value changes.
The company law legislation aims to protect the company’s capital base and ensure dividends are paid out of “real” profits, thereby protecting creditor interests and preventing erosion of capital.
Thus, distributing unrealised or notional gains could expose the company (and its creditors) to risk if those gains reversed. The legal restriction is a form of capital maintenance concept.
Conclusion
In sum: reportable profits (what Ind AS shows) is not always the same as distributable profits (what a company can legally pay out). The presence of items such as unrealised fair-value gains, which are recognised in profit but not “realised” and hence, not available for distribution under company law, creates this difference. Understanding this distinction is essential because in the end, the dividend cheque flows only from the legally distributable pool and not simply from what the profit and loss account might suggest.
Regulatory reforms to ensure EoDB for Debenture Trustees are being discussed and implemented in phases since January, 2025. SEBI proposed amendments with respect to permissible activities of DTs, the manner of utilisation of Recovery Expense Fund, specified rights of DTs with corresponding obligations on issuers and introduction of a model debenture trust deed through a consultation paper (‘CP’) dated November 04, 2024, which were deliberated in its meeting held on December 18, 2024, and finally approved the revised proposals on June 18, 2025.
In this article, we have discussed threadbare the regulatory changes approved in June 2025 and notified in October, 2025 by SEBI and actionables arising therefrom for issuers & DTs, pursuant to amendments made in SEBI (Debenture Trustee) Regulations, 1993 (‘DT Regulations’), SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) that become effective from October 27, 2025 for DT Regulations and LODR Regulations and October 28, 2025 for NCS Regulations. The 2nd tranche of amendments approved by SEBI are notified by three circulars issued on November 25, 2025 relating to terms and conditions for undertaking permissible activities by DTs (SEBI Circular 1), utilisation of Recover Expense Fund (SEBI Circular 2) and timelines for submission of details by issuers to DTs (SEBI Circular 3).
Permissible Activities for DTs [newly inserted Reg. 9C in DT Regulations and SEBI Circular 1]
Key issue:
SEBI primarily governs DTs through DT Regulations, which presently do not restrict DTs to undertake any activities. However, based on the revenue data of the top 5 DTs, SEBI raised a concern that DTs presently undertake other trusteeship activities, which are either regulated by other Financial Sectors Regulators (FSR) like (securitisation trustee, security trustee, public deposit trustee) or not expressly regulated by any authority (outside purview of SEBI such as being an escrow agent, facility agent, monitoring agent, trustee for unlisted NCDs), thus creating potential regulatory and systemic risks. Another limitation is that SEBI cannot effectively address investor grievances or issues arising from such unregulated activities.
Proposal:
SEBI proposed to allow DTs to undertake such activities (not regulated by SEBI) which are governed by any Financial Sector Regulator (FSR). However, any other unregulated activities are required to be hived off to a separate legal entity within 1 year. However, later on SEBI dropped the proposal of hiving off in its meeting in December 2024.
Present Amendment:
Fig 1: Activities permitted to be carried on by DTs
With respect to the term ‘Separate Business Unit’ (SBU) though not defined in the amendment, a reference can be drawn from the SEBI Board Agenda (Para 3.7.3.), now notified in SEBI Circular 1, which states that DTs shall undertake activities not regulated by SEBI through one or more Separate Business Unit of the DT, segregated by a Chinese Wall and ring-fenced from the SEBI regulated activities. This seems like a relaxation for the DTs, where permitted activities can be housed under one entity but only in different segments/ divisions, compared to the initial proposal of hiving off to a separate legal entity.
A timeline of 6 months from the date of notification (i.e by April 27, 2026) has been provided to transfer permitted activities to a separate business unit.
Another major restriction which Reg. 9C (1) provides, is a prohibition on RBI-regulated entities to undertake DT activities. DTs which are also RBI-regulated are mandated to carry out activities of DT through a separate business unit only.
Additionally, Reg. 9C(2) mandates DTs to ring-fence the net worth stipulated in DT Regs. (Reg. 7A) to ensure that it remains insulated from any adverse impact arising from undertaking other activities by DT.
SEBI Circular 1 lists out the conditions imposed on DTs to carry out activities not regulated by SEBI:
Fig 2: Conditions on DTs for carrying out activities not regulated by SEBI
Standardisation of Debenture Trust Deed (‘DTD’) format
Key issue:
Extant regulatory framework viz. Reg 18 of NCS Regulations and Reg 14 of the DT Regulations do not provide for a standard format of DTD. Instead, the provisions indicate the mandatory contents of DTD as prescribed under section 71 of the CA, 2013 read with rule 8 of Companies (Share Capital and Debenture) Rules, 2014 and form SH-12. Due to this, DTDs were observed to have different contractual terms and their documentation varied from issuance to issuance. Hence, a standardised format was necessary for market optimisation, which is flexible enough to accommodate commercial understanding amongst the parties.
Proposal:
In light of the concerns discussed above, Industry Standards Forum – Debt (ISF Debt), proposed four model DTDs categorised as secured public issue, unsecured public issue, secured privately placed issue and unsecured privately placed issue. Model DTD in case of secured NCDs was provided in the CP (broadly divided into 4 parts- see fig 2 below).
Fig 2. Indicative bifurcation of DTD as proposed in annex- 1 of the CP.
Present Amendment:
While the model DTD is yet to be notified, SEBI has rolled out the enabling amendments in DT Regulations and NCS Regulations. As a result, the erstwhile requirement of having DTD in 2 parts viz.“Part A containing statutory/standard information pertaining to the debt issue; and Part B containing details specific to the particular debt issue” is done away with.
In case the issuer intends to deviate from the to be notified format of DTD, DTs may permit, subject to disclosure of a key summary sheet of deviations along with the rationale in the offer document of NCDs (GID/ KID/ shelf prospectus).
Utilisation of Recovery Expense Fund (‘REF’)
Key issue:
Reg. 11 of NCS Regulations mandates issuers of NCDs to create REF with the stock exchanges to enable the DT to take prompt action for enforcement/legal proceedings in case of ‘default’. The existing framework (Chapter IV of Master circular for Debenture Trustees) only lists out the illustrative expenses (legal expenses, cost for hosting meetings etc) and not the explicit list of eligible expenses. Since, DTs require prior consent of debenture holders to utilise REF funds, the absence of a clear expense list often leads to delays and difficulties in obtaining approvals and reimbursements.
Proposal:
SEBI proposed to provide an indicative list of eligible expenses for utilisation of REF (refer CP). Additionally, for eligible expenses, a mere intimation to the debenture holders would be sufficient to utilise REF. However, for other expenses, prior approval is still required. DTs will also be required to furnish a certificate from the auditor (format is yet to be notified) to the stock exchanges w.r.t eligible expenses to claim from REF.
Newly inserted Reg. 15A(3) in the DT Regs allows DTs to utilise REF in the manner specified by SEBI. Manner of utilisation and other conditions, as approved by SEBI above, have been notified by SEBI Circular 2, which has the effect of modifying Chapter IV of Master Circular for Debenture Trustees. .
As per the said circular, the following expenses can be reimbursed from REF without obtaining prior consent from debentureholders. However, DTs shall intimate debenture holders through mail and upload the details of reimbursement from REF on its website.
Expenses related to enforcement/ legal proceedings
Voting process
Holding of meeting of debenture holders
Filing court applications
Legal fees
Expenses for asset recovery services
Appointment of legal consultants for enforcement/ legal proceedings
Any other expenditure may be claimed only with the prior consent of the debenture holders followed by intimation thereof to the designated stock exchange.
Further, in both the cases, the DT is required to submit an independent auditors’ certificate regarding the expenses incurred to the designated stock exchange for its verification. The amount shall be released from the REF only after verification of the said certificate.
Issuers to furnish information to DTs [Reg. 56 of LODR]
Key issue:
Certain compliance obligations are bestowed upon DTs with express timelines, for which DTs rely on the information provided by the issuers. However, corresponding responsibility, in respect of such compliances, has not been explicitly established for the issuers.
Proposal:
To specify the timeline for issuers to furnish information to the DT as per Reg. 56 of LODR Regulations to enable the DTs to keep a track of the status of compliances by the issuer and make necessary timely compliances as applicable to them.
Reg. 56 of the SEBI Listing Regulations is amended to provide a timeline of 24 hours from the occurrence of the event or information, within which issuers are required to furnish information to the DTs.
Additionally, SEBI circular 3 has provided for the timelines for submission of the following reports / certificates by the issuer to the DTs (note that para 1.2 of chapter VI of DT Master Circular has specified the timelines for similar reports / certificates to be furnished by DTs to the recognised stock exchange). The timelines are applicable from the quarter ended December 31, 2025.
Security Cover certificate
Under the extant regulatory framework, DTs are required to monitor security cover maintained by the issuer in pursuance of regulation 15(1)(t) of the SEBI DT Regulations on a quarterly basis. Additionally, DTs are also required to obtain a certificate from the statutory auditor of the issuer on a half yearly basis and furnish the same to the stock exchange. Pursuant to para 1.2 of chapter IV of DT Master Circular, DTs are required to furnish the same to the stock exchange within 75/90 days from end of quarter
Similar obligations are imposed on issuer under the Listing Regulations, where issuer is required to furnish security cover certificate u/r 54 along with the submission of financial results within 45/60 days from end of quarter (as per Reg. 52) Issuer is required to furnish the security cover maintenance certificate provided by the statutory auditor and compliance with covenants to the DT on a half yearly basis along with submitting financial results u/r 52 to the DTs within 24 hours from occurrence of event/ receipt of information. [reg 56(1)(d) of Listing Regulations and para 5.5 of chapter III of DT Master Circular].
Vide this SEBI Circular 3, SEBI has prescribed the timeline of 60/75 days from end of quarter for furnishing security cover certificate to the DT for further submission to stock exchanges. While the idea of this circular was to impose corresponding obligations on the issuer to submit necessary documents to DT, the issuers were already under the obligation to provide a security cover certificate to DTs within the timelines prescribed in Reg. 54 & 56.
Evidently, Listing Regulations have a relatively stricter timeline on the issuers for furnishing the security cover certificate to the DT, which has to be complied with irrespective of the new timelines so prescribed.
Other reports / certificates
Reports/ Certificate
Periodicity/timeline specified for the issuer in SEBI Circular 3
Periodicity/timeline specified for the DTs in the Master Circular
A statement of value of pledged securities
Quarterly basis 60 days – end of quarter 75 days – end of last quarter
Quarterly basis 75 days – end of quarter 90 days – end of last quarter [Para 1.2 of chapter VI of the DT Master Circular]
A statement of value for Debt Service Reserve Account or any other form of security offered
Net worth certificate of guarantor (in case debt securities are secured by way of personal guarantee)
Half yearly basis 60 days – end of each half-year
Half yearly basis 75 days – end of each half-year [para 1.2 of chapter VI of DT master circular]
Financials/value of guarantor prepared on basis of audited financial statement etc. of the guarantor (secured by way of corporate guarantee)
Annual basis 60 days – end of each financial year
Annual basis 75 days – end of each financial year
Valuation report and title search report for the immovable/ movable assets, as applicable.
Once in three years 60 days – end of the financial year
Once in three years 75 days – end of the financial year
It is to be noted that till now, the issuers were not expressly mandated by law to furnish the reports / certificates mentioned in point B above to the DT, but were still providing the same as per the terms specified in DTD. The issuers are obligated to furnish the above certificates / reports within the aforestated timelines.
Conclusion
This amendment, though focused on EoDB, has placed an enhanced responsibility on the DTs and issuers to ensure timely compliance. DTs are now required to conduct non-SEBI regulated activities through separate business units while keeping their net worth protected from any adverse impact and segregating the records and resources from the SEBI-regulated activities. A relaxation is also provided for claiming eligible expenses from REF without prior approval of the debenture holders.
Another highlight of the amendment is the introduction of model DTD, requiring issuers to disclose any deviations with proper justification in the offer document. However, the same is yet to be notified.
Also, disclosures by issuers to DTs are now time bound where items u/r 56 of Listing Regulations are to be provided within fixed timelines of 24 hours and other reports/ statements within defined timelines & periodicity.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-11-03 11:46:332025-11-28 11:48:46A MIX OF EASE AND BURDEN: SEBI’s latest regulatory push redefines the role of DTs and issuers
Designated persons, being insiders with regular privileged information flow, cannot be doing what other investors can do. Several option trades may be devices to skim short term swings in share prices. can designated insiders do these? This interesting question, mostly ignored in Indian corporate practice, is explored in this article.
Derivatives trading is becoming increasingly popular in India, including amongst the retail investors. A recent address by SEBI’s Chairman urges the retail investors to assess their risk capacity while dealing in derivatives and avoid speculative trades. A July 2025 study by SEBI on trading activity of investors in Equity Derivatives Segment (EDS) indicates a relatively very high level of trading in EDS, as compared to other markets, particularly in index options. Further, within EDS, options segment (in premium terms) has shown growth at the fastest rate with average daily premium traded growing at the CAGR of 72% for index options and 54% for single stock options.
Given the large volumes of derivatives trading, in addition to the concerns on loss of investor’s money (nearly 91% of individual traders incurred net loss in EDS in FY 2025), it is also important to examine the concerns which would arise from an insider trading perspective. Pertinent questions would be whether derivatives trading also comes within the purview of insider trading, and if the answer to this is yes, whether it will also attract the prohibition around contra-trade, where the market participants bet on the short-term future value of the underlying assets to make a profit.
This article examines the aforesaid questions in the light of extant laws, and global position.
Prohibition on insider trading
The prohibition on insider trading comes from Section 12A of SEBI Act –
“No person shall directly or indirectly—
(d) engage in insider trading;”
Reg. 4(1) of PIT Regulations applicable universally to all insiders, also puts a blanket prohibition on trading when in possession of UPSI:
“No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
Para 4 of Schedule B (model CoC for listed entities) specifically pertains to trading by Designated Persons (DPs). They can trade subject to compliance with the Regulations – which provide for monitoring through the concept of “trading window” that is, during which a DP can be reasonably expected to have access to UPSI. Therefore, at such times, the trading window is closed, and the DP cannot trade in securities of that company. When the trading window is open, trading can take place after getting pre-clearance from the Compliance Officer.
In case of a fiduciary, the monitoring happens through a grey list. The concerned persons have to take preclearance from the Compliance Officer. Here, trading restrictions are applicable for securities of such listed companies, for which the person/s is/are acting as fiduciary.
Derivative trading vis-a-vis insider trading norms in India
Prohibition on derivative transactions under 1992 Regulations
“4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.”
Thus, under the 1992 Regulations, there was a complete and explicit prohibition on derivative transactions for designated employees. Note that the ban was for “any time” and not restricted to only while in possession of UPSI.
Position under the 2015 Regulations
While the contra-trade restrictions have been retained in the existing (2015) Regulations, the provision explicitly calling for blanket prohibition on derivative transactions was omitted. The Sodhi Committee Report does not contain any specific discussions in this regard.
Nonetheless, derivatives, qualifying the definition of “securities”, continue to be covered by the insider trading regulations. Reg 6(3) of the 2015 Regulations specifically refers to trading in derivatives, for the purpose of disclosure of trading in securities.
The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this Chapter.
As regards the value of derivatives for such disclosures, the same refers to the “traded value” of the derivatives. The format for such disclosures, as specified in the SEBI Master Circular on Surveillance of Securities Market (Annexure – I), also refers to disclosure of trading in derivatives on the securities of the company, and requires calculation of notional value of options based on premium plus strike price of the options.
Further, trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular].
Whether the immediate relative of the designated person can trade in the derivatives of the company?
Answer
Yes. Designated person and its immediate relative can trade in derivatives when not in possession of UPSI and such trades are accordingly governed by the code of conduct.
Thus, the following points may be noted –
A person cannot undertake insider trading in securities – directly or “indirectly”. Derivatives are defined under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956.
“Derivative”—includes
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central Government to be derivatives;
Therefore, trading in derivatives may technically tantamount to trading in underlying securities – indirectly. This is irrespective whether the transaction results in actual delivery or is only net-settled in cash.
The definition of “securities” includes derivatives – hence, there should not be any confusion as to why trading in derivatives of the underlying securities should be excluded from the scope of “trading”
Chapter III of PIT Regs. which is applicable to all insiders (note, that DPs are closest insiders), explicitly says that trading in securities includes trading in derivatives.
SEBI FAQ (Q. 52 above) makes it clear that trading in derivatives is only possible when the DP/ immediate relative is not in possession of UPSI[1]. Of course, whether or not the DP/immediate relative is having possession of UPSI or not, is to be seen at the time the trading is proposed to be done.
Therefore, what is clear is that unlike the 1992 Regulations, there is no explicit provision calling for blanket prohibition on the derivative transactions by DPs and their immediate relatives. However, restrictions as are applicable otherwise in relation to securities of a listed company, would also apply to derivatives having such securities as underlying. Of course, the restriction is not a blanket prohibition as was in 1992.
In simple terms, a derivative should be treated no differently than the underlying security itself. Consequently, in view of the author:
When the trading window is closed, a DP should not be allowed to enter into a derivative in securities as well.
When the trading window is open, trading in derivatives should be subjected to preclearance.
The above position is also apparent in other jurisdictions, where, in the context of insider trading norms, dealing in derivatives is equivalent to dealing in underlying securities.
Once it is clear that trading in derivatives is equivalent to trading in underlying security, then it is obvious to conclude that trading in derivatives will also be governed by contra-trade prohibition in the same manner as trading in the underlying itself. See detailed discussion below.
Issues concerning contra-trade
Rationale for prohibiting contra-trade
The insider trading norms around the world prohibit contra trade or short swing trades by the persons privy to or likely to be privy to unpublished price sensitive information (UPSI) about the listed securities. The SEBI (Prohibition of Insider Trading) Regulations, 2015 restricts the Designated Persons (DPs) and their immediate relatives from undertaking reversal trades, within six months from undertaking the previous trade transaction. The intent is to prevent the abuse of UPSI by making short-term profits through unfair means.
The 2008 Consultation Paper states, “It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not.”
Hence, whenever there is a contra-trade within a short span of time (6 months), there is a presumption that the said trade is based on some “superior” access to information – as such, contra-trades are simply prohibited. The DP cannot undertake a contra-trade even if it is contended that he does not have UPSI.
Contra-trade in case of derivatives
Naturally, a question arises on whether DPs can trade in derivatives, and if so, when does the same qualify as contra-trade or otherwise, and the consequences that follow. Let’s take a simple illustration – Mr. A, a DP of X Ltd. purchases 100 shares of X Ltd. on 1.11.2024. Then purchases a put option on 15.11.2024, for all 100 shares. On 01.02.2025, on maturity of the put option, A exercised the put option and sold all the 100 shares. All these transactions, as one would note, are happening within a period of 6 months. The question is – whether A was allowed to undertake the 2nd transaction of purchasing a put option within 6 months of the 1st transaction.
There is a question appearing in SEBI FAQ, as follows:
37.Question
In case an employee or a director enters into Future & Option contract of Near/Mid/Far month contract, on expiry will it tantamount to contra trade? If the scrip of the company is part of any Index, does the exposure to that index of the employee or director also needs to be reported?
Answer
Any derivative contract that is physically settled on expiry shall not be considered to be a contra trade. However, closing the contract before expiry (i.e. cash settled contract) would mean taking contra position. Trading in index futures or such other derivatives where the scrip is part of such derivatives, need not be reported.
This question above clearly deals with treatment of expiry of a derivative contract or settlement of a derivative contract as to whether those events would be treated as contra-trade. That is, a culmination of a derivative contract, resulting in the delivery of the underlying will, of course, not amount to a separate “trade” – therefore, there is no question of a contra-trade. On the other hand, where no physical delivery is taken, rather, settled in cash (payment of the difference between the contract’s entry price and market price at expiry), the same amounts to a “sell” trade, thereby, a reversal of the position of the DP. Thus, where the contract is proposed to be settled prior to expiry, it would result in a different transaction/trade – thus, it should be treated as a contra-trade.
Now, if seen in a practical context, in India, the validity of derivatives contract would usually be less than 6 months (typically 1-3 months[2]). And, typically, these derivative transactions in such cases are net-settled before expiry, rather than culminating in actual delivery of securities[3]. Options enable the investors to speculate in shares of higher values and volumes as compared to the cash segment since the only amount payable would be the premium and the net difference in the strike price and spot price later on. Further, cash settlement in derivatives provides a higher leverage to the trader.
In the above scenario, there will always be a higher possibility of a contra-trade. The illustrations below explain the same:
S. No
Transaction
Remarks (assuming T1 and T2 happen within a period of 6 months)
1
T1 – Buy call option T2 – Cash settlement
Contra trade. Buying call option is equivalent to a “buy” transaction. Subsequent cash settlement indicates a “sale” transaction.
2
T1 – Buy call option T2 – Physical settlement
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, subsequent physical settlement only results in delivery of such shares.
3
T1 – Buy call option T2 – Expiry of option on account of out-of-the money
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, however, did not result in delivery on account of the strike price > market price at the time of expiry.
2
T1 – Sell call option T2 – Cash settlement
Contra trade. Selling call option is a “sale” transaction. Cash settlement indicates a “buy” transaction.
3
T1 – Buy put option T2 – Cash settlement
Contra trade. Buying put option is a “sale” transaction. Not taking physical delivery of the shares and carrying out cash settlement indicates a “buy” transaction.
4
T1 – Sell put option T2 – Cash settlement
Contra trade. Selling put option is a “buy” transaction. Cash settlement is deemed to be a “sale” transaction.
As such, trading in derivatives would be much more vulnerable to chances of insider trading, than actual trading in securities. Hence, it becomes extremely important to put mechanisms in place to ensure that derivatives trading be subjected to enhanced restrictions and controls, as suggested below.
Enhanced safeguards in respect of derivative transactions by DPs
It is quite clear that a derivative transaction that results in cash settlement construes a contra-trade. On the other hand, where physical delivery is taken (although it is not very common to close a derivative contract in physical settlement), the derivative transaction is not considered as a contra-trade (although the same is also to be matched against the previous trade in cash segment). Therefore, in order to ensure that the trade does not result in contra-trade, it is essential that the derivative is either settled by delivery or simply expires on the maturity date, and that there is no cash settlement.
In order to ensure this, in case of purchase of options (put/ call) by the DP, pre-clearance may be provided by the Compliance Officer subject to receipt of a declaration that the DP shall necessarily undertake physical settlement of such trades at the maturity date. Of course, there would be no concerns in case of an out-of-the money option, that is, where prior to the expiry of the contract, the market price remains below the strike price. An out-of-the money option does not result in any profits in the hands of the option holder, however, prevents additional loss in the face of exercising an option where the strike price at which the option is exercised and shares are acquired is higher than the current market price at the time of such exercise of option (upon maturity of the contract).
On the other hand, in case of sale of options (put/ call) by the DP (that is, where the DP is the writer of the option), the physical settlement cannot be guaranteed by the DPs, and chances of contra-trade are higher, as the counterparty (that is, buyer of the option) may choose to have cash settlement before the expiry of the derivative contract. Therefore, in order to obviate the possibility of a contra-trade happening, it might be necessary to completely prohibit sale/writing of options by DPs. This prohibition may be enabled through the code of conduct. . In fact, it is seen that several large listed companies have put a blanket prohibition on derivative transactions by DPs and their immediate relatives.
Contra-trade where there is a preceding/succeeding trade in securities
Besides, this FAQ does not deal with a scenario where a DP who has traded in securities already, now proposes to enter into a derivative contract within a span of 6 months from the date of original contract.
However, one thing is clear from this FAQ – the very entering into the derivative contract (and not expiry/maturity thereof) has been considered to be a trade by SEBI. Also, as discussed in the first part of this article, trading in derivatives should be considered as trading in securities itself. As such, if there has been a trade in securities, and there is a subsequent trade, although in derivatives of those very securities, it would result in contra-trade. That is, if in the above example, A enters into a “put option” – then he will have the right but not the obligation to “sell” the underlying shares, within 6 months of buying the shares. Whether to actually “sell” or have a concrete “right to sell” at a future date at or above a given price – it is nothing but a clear case of “contra-trade”.
For instance, assume a DP purchases shares of the listed company on 1.1.2025. Subsequently, on 1.3.2025, the DP purchased a put option. The put options, akin to a sale transaction, results in contra-trade when matched against the previous “buy” transaction in the cash segment, within a gap of less than 6 months between the two transactions. Similarly, where a call option is bought within 6 months of a previous sale transaction, the same results in contra trade.
Compliances in relation to trading in derivatives by DPs
(1) Appropriate mechanisms in the Code of Conduct
Prior to making trades in the derivatives, it is important for the DP to ensure that the Code of Conduct does not prohibit such trades. Unless expressly prohibited, the Code of Conduct may contain necessary clauses as discussed above, in order to enable derivative trading by DPs, subject to enhanced controls on the same.
(2) Manner of identification of derivative trades
The trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular]. Hence, an instance of contra trade through derivative instruments is easily identifiable by the Compliance Officer.
(3) Pre-clearance for the purpose of trading
Not all trades of DPs are pre-cleared by the Compliance Officer. The pre-clearance is required only for such trades that exceed the thresholds provided in the CoC of the respective listed entity, generally Rs. 10 lacs or more. Here, the value of trade becomes important, and cannot be just limited to the premium payable/ receivable at the time of purchase/sale of such contract. The price of the securities is also relevant. Pre-clearance may be granted by the Compliance Officer, subject to such conditions and undertaking as suggested above.
(4) Trading during closure of trading window
The DPs cannot trade in the derivatives of a company’s securities during the trading window closure period. In order to ensure the trades are not done during the trading window closure period, the concept of freezing of PAN has been introduced – both at the level of the DP as well as their immediate relatives (see an article here). However, the freezing of PAN is applicable only to the quarterly TW closure pending announcement of financial results.
The DP to ensure that neither him, nor his DPs trade in the derivatives of the company during the closure of trading window period.
(5) Reporting of trades in derivatives
As regards the reporting of trade in derivatives, the SEBI Master Circular provides guidance on calculation of notional value of trades, to be calculated based on premium plus strike price of the options. The disclosure of trades are primarily system-driven, based on the PAN details of the DPs updated with the designated depository. Having said that, in case of trades of the immediate relatives of the DPs, or where the PAN details are not updated with the depository, manual disclosures are required for such trades.
(6) Consequences of violation – disgorgement of profits and penal actions
A breach of contra trade restriction leads to disgorgement of profits made and its remittance to SEBI for credit to IPEF. Here, the question arises on what is considered the value of profits for disgorgement to IPEF, in the context of derivatives.
Where the transaction pertains to ‘sale’ of options, the profits would usually be the premium earned by the seller of options. On the other hand, in case of ‘purchase’ of options, the profits should be the difference between the buy and sale value, net of other expenses in connection with such option contracts.
Guidance may also be taken from 17 CFR § 240.16b-6(d) of the SEC Act, which states that the amount of profit shall be calculated as the profits that would have been realized had the subject transactions involved purchases and sales solely of the derivative security valued as of the time of the matching purchase or sale, and calculated for the lesser of the number of underlying securities actually purchased or sold. The amount of such profit shall not exceed the premium received for writing the option.
In addition to disgorgement of profits, penalty may also be levied. For instance, in an adjudication order dated 29th April 2022, the purchase and sale of options on consecutive days resulted in contra trade violation attracting a penalty of Rs. 2 lacs.
Global view on contra-trade in derivatives
Section 16(b) of the Securities and Exchange Commission Act, 1934 of the USA, restricts contra trade in equity securities, for a beneficial owner holding more than 10% of any class of any equity security, director and officer, including a security-based swap agreement involving any such equity securities. Exemptions have been prescribed for derivative transactions in certain cases in CFR § 240.16b-3 of the General Rules and Regulations.
The General Rules and Regulations of the SEC provides detailed guidance on when a derivative trade qualifies as a short swing trade and vice versa. The same has been summarised here:
Transactions that qualify as “purchase” of underlying securities:
establishment/ increase of a call equivalent position
liquidation/ decrease of a put equivalent position
Transactions that qualify as “sale” of underlying securities:
establishment/ increase of a put equivalent position
liquidation/ decrease of a call equivalent position
Transactions that are exempt from short swing restrictions:
increase/ decrease pursuant to fixing of the exercise price of a right initially issued without a fixed price, where the date the price is fixed is not known in advance and is outside the control of the recipient
Closing as a result of exercise or conversion of the option, that is,
Acquisition of underlying securities at a fixed exercise price due to the exercise or conversion of a call equivalent position
Except in case of out-of-the money option, warrant or right
Disposition of underlying securities at a fixed exercise price due to the exercise of a put equivalent position.
Where the person trading is not a major beneficial holder, and thus, an insider, at the time of both the transactions which are being termed as contra trade [Section 16-b of SEC Act].
Other exemptions apply w.r.t. transactions with the issuer, subject to certain conditions and transactions pursuant to tax conditioned plans [CFR § 240.16b-6]
Article 164 of the Financial Instruments and Exchange Act, 1948 of Japan also restricts reverse trades in specified securities, by major shareholders and officers etc, who may have obtained secret information in the course of their duty or by virtue of their position. Specified securities, for the purpose of the said provision, include Derivatives [Article 163 r/w Article 2(xix)].
Judicial precedents on contra trade transactions
In Allaire Corporation v. Ahmet H. Okumus, the Circuit Court held that when the option is written by the insider, he has no control over whether the options buyer will exercise the option or square it off. Thus, trade carried out pursuant to selling an option shall not be considered a transaction for the purpose of determining whether a set of transactions is a contra trade or not. The facts of the case involved writing another option within six months of expiry of the first option remaining un-exercised. Note that the expiration of the first set of options does not constitute a purchase matchable to the later sale of a different set of call options.
However, as clarified in Roth v. The Goldman Sachs Group, Inc., et al., No. 12-2509 (2d Cir. 2014), when matched against its own writing, the expiration of an option within six months is a “purchase transaction” for the purpose of section 16-b.
The danger of misuse of non-public information exists at the time the option is written, and the expiration of that option is the moment of profit. Matching writings with expirations of different options does not clearly advance the purposes of the statute. Options written at different times are less likely to give rise to speculative abuse, and matching the expiration of an option only to its own writing recognizes the more evident danger.
In Chechele v. Sperling,the Circuit Court held that where pursuant to the settlement of the futures contract, the pledge on shares is revoked, the revocation is not considered to be a ‘purchase’ transaction to be combined with the open market sale of such shares to identify these trades as contra trades.
The exercise of a traditional derivative security is a “non-event” for section 16(b) purposes.
In the case of Macauley Whiting v. Dow Chemical Company, the Court held that where the insider has exercised an option to purchase shares and his spouse has sold shares within a period of 6 months, these transactions shall be considered to be short swing trades (contra trades).
In the context of § 16(a), the Commission has evolved a dual test of an insider’s beneficial ownership of his or her spouse’s shares. Such beneficial ownership may derive from the insider’s “power to revest” in himself title to those shares.[6] Or it may result from his enjoyment of ‘benefits substantially equivalent to those of ownership.’
In the case of Kern County Land Co. v. Occidental Petr. Corp., a person fails in his attempt of a takeover due to a defensive merger carried out by the target company. During the period when the merger was being finalised, the acquirer entered into an option agreement with the transferee company. The option agreement stipulated that if and when the merger succeeds, the transferee company would buy the shares held by the acquirer pursuant to the takeover attempt. The US Supreme Court held that such a set of trades would not result in contra trade because the actions of the acquirer were involuntary.
The option was grounded on the mutual advantages to respondent as a minority stockholder that wanted to terminate an investment it had not chosen to make and Tenneco, whose management did not want a potentially troublesome minority stockholder; and the option was not a source of potential speculative abuse, since respondent had no inside information about Tenneco or its new stock.
Concluding Remarks
In practice, several large listed companies continue to prohibit trading in derivatives by the Designated Persons and their immediate relatives through their Code of Conduct. The regulations do not enforce such blanket prohibition, although no trading can be done that falls foul of other requirements of the Regulations – viz., trading while in possession of UPSI, contra trades, trading during closure of trading window, trading without pre-clearance etc.
Having said that, derivatives, by nature, are short term trades based on the expectations of the movement in price of the securities in a certain direction within a short period of time. Therefore, in case of trades by DPs, the chance of such trades being motivated by an information asymmetry is comparatively higher, thereby potentially resulting in an insider trading allegation on such DP.
[1] Annexure VII of ICSI Guidance Note on Prevention of Insider Trading states “The designated persons and their immediate relatives shall not take any positions in derivative transactions in the Securities of the company at any time.” However, the source of such stipulation is not clear, as currently there is no corresponding provision in PIT Regulations.
Since the introduction of High Value Debt Listed Entities (HVDLEs) as a category of debt-listed entities placed on a similar pedestal to equity-listed entities in terms of corporate governance norms, the regime has undergone several rounds of extensions and regulatory changes. After several extensions towards a mandatory applicability of corporate governance norms, a new Chapter V-A was introduced in LODR, vide amendments notified on 27th March 2025 (see a presentation here), amending, amongst others, the thresholds towards classification of an entity as HVDLE (increased from Rs. 500 crores to Rs. 1000 crores). The new chapter, however, was not updated for the changes brought for equity-listed entities vide the LODR 3rd Amendment Regulations, 2024 and required some refinement, particularly, in respect of provisions pertaining to related party transactions (see an article – Misplaced exemptions in the RPT framework for HVDLEs and the representation made to SEBI).
In order to address the gaps as well as providing some relaxations to HVDLEs, SEBI released a Consultation Paper on 27th October, 2025 (CP) primarily proposed an increase in the threshold for identification as HVDLEs and alignment of provisions of Chapter V-A with the corresponding provisions in Chapter IV subsequent to LODR 3rd Amendment Regs, 2024 facilitating ease of doing business, including measures related to RPTs. The proposals were approved by SEBI in its Board Meeting held on 17th December, 2025.
SEBI vide Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2026 (‘LODR Amendment 2026’), has notified the following amendments effective from January 22, 2026.
Threshold for identification of HVDLEs
Increased from extant Rs. 1000 crores to Rs. 5000 crores . Further, the sunset clause of 3 years as per Reg 15 (1AA) & Reg. 62C(2) will not be applicable to entities that cease to be HVDLE due to revised thresholds.
Based on the data of pure debt listed entities as on June 30, 2025, revision in threshold will reduce the number of HVDLE entities from 137 to 48 entities (apprx. 64% entities)
VKCO Comments: The increase in the threshold was necessitated on account of the huge compliance burden placed on HVDLEs coupled with the fact that such threshold is disproportionately low for NBFCs engaged in substantial fundraising through debt issuances. Further, the proviso to Reg. 15 (1AA) & Reg. 62C (2) expressly clarifies the position for entities ceasing to be an HVDLE as on January 22, 2026 with the revised threshold coming into effect, that it need not continue to comply with the CG requirements for a period of 3 years. Earlier there had been instances of entities that ceased to be HVDLEs due to outstanding value of listed debt securities as on March 31, 2025 receiving notices from SEs for non-compliance with CG norms despite such entities ceasing to meet the revised threshold.
Alignment of corporate governance norms for HVDLEs with that for equity-listed entities
Board composition, committees, filing of vacancy of director/ KMPs etc.
Insertion of proviso to clarify that prior approval of shareholders is required for directorship as NED beyond the age of 75 years at the time of appointment or re-appointment or any time prior to the NED attaining the age of 75 years to ensure alignment with similar amendment made for equity listed entities [Reg 62D(2)/ Reg 17(1A)]
Time taken to receive approval of regulatory, government or statutory authorities, if applicable, to be excluded from the 3 months’ timeline for shareholders’ approval for appointment of a person on the Board [Reg 62D(3)/ Reg 17(1C)]
Exemption from obtaining shareholders’ approval for nominee directors of financial sector regulators or those appointed by Court or Tribunal, since such nomination is for the purpose of oversight and upholding public interest, and by SEBI registered Debenture Trustee registered under a subscription agreement for debentures issued by HVDLEs [Reg 62D(3)/ Reg 17(1C)]
Any vacancy in the office of a director of an HVDLE resulting in non-compliance with the composition requirement for board committees i.e., AC, NRC, SRC and RMC to be filled within 3 months [Proviso to Reg 62D(5)/ Reg 17(1E)]
Any vacancy in the office of a director of an HVDLE on account of completion of tenure resulting in non-compliance with the composition requirement for board committees i.e.. AC, NRC, SRC and RMC to be filled by the date such office is vacated [Second proviso to Reg 62D(5)/ Reg 17(1E)]
Additional timeline of 3 months for filling vacancy in the office of KMP in case of entities having resolution plan approved, subject to having at least 1 full-time KMP [Reg 62P (3)/ Reg 26A (3)]
Secretarial Audit
Alignment of the provisions of Secretarial Audit and Secretarial Compliance Report with Reg 24A as applicable to equity listed entities, to strengthen the secretarial audit and to prevent conflict of interests, which mandates the following: [Reg 62M(1)/ Reg 24A]
An individual may be appointed for a term of 5 years and a firm may be appointed for a maximum of 2 terms of 5 years each subject to approval of shareholders in the annual general meeting. Thereafter a cooling-off period of 5 years will be applicable;
Requirements relating to eligibility (being a Peer Reviewed Company Secretary) and disqualifications, removal of secretarial auditors prescribed.
The Secretarial Compliance Report also to be submitted by a Peer Reviewed Company Secretary or Secretarial Auditor fulfilling the eligibility requirements indicated in Reg. 24A.
VKCO Comments: Further disqualifications for Secretarial Auditor and list of services that cannot be rendered by the Secretarial Audit was prescribed vide Annexure 2 and Annexure 3 of SEBI Circular dated December 31, 2024 and further clarified vide SEBI FAQs on Listing Regulations (FAQ no. 5) and list of services provided by ICSI.
The amendments made in Reg 24A in December, 2024 were required to be ensured by the equity listed companies with effect from April 1, 2025 for appointment, re-appointment or continuation of the Secretarial Auditor of the listed entity. Therefore, it was amply clear that the applicability is prospective and to be ensured while appointing Secretarial Auditor for FY 2025-26 onwards. Reg. 24A (IC) clarifies that any association of the individual or the firm as the Secretarial Auditor of the listed entity before March 31, 2025 is not required to be considered for the purpose of calculating the tenure.
Pursuant to LODR Amendment 2026, Reg. 62M (1) cross refers to the requirements under Reg 24A which in turn mandates compliance with effect from April 1, 2025. However, it may not be practically feasible for HVDLEs to ensure compliance towards the end of the financial year and a transition time may be required by such HVDLEs. In our view, the requirements should be applicable for Secretarial Auditor appointments with effect from April 1, 2026 which will be required to be done with shareholders’ approval at the AGM 2026 and not impact the existing tenure/ appointments already done by HVDLE.
Related Party Transactions
Alignment of RPT related provisions with Reg 23, instead of reproducing each of the amendments made in Reg 23 effective from December 13, 2024 and November 19, 2025 [Reg 62K (1)]
Turnover scale based materiality thresholds for RPTs and other amendments applicable to equity-listed entities are now applicable to HVDLEs (see an article on the approved amendments here)
NOC of debenture-holders through DT to be obtained in the manner prescribed by SEBI [Reg 62K (5)] (see our FAQs here)
Aligning the exemptions from RPT approval and clarification on ‘listed’ holding company, with amendments made in Reg. 23 (5) [Reg 62K (7)]
VKCO Comments: Pursuant to the above amendments, HVDLEs will be able to avail the benefits of recent amendments made in Reg 23 as detailed below:
Remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management, except who is part of promoter or promoter group, shall not require audit committee approval or disclosure if it is not material.
Independent directors of the audit committee, can provide post-facto ratification to RPTs within 3 months from the date of the transaction or in the immediate next meeting of the audit committee, whichever is earlier, subject to certain conditions like transaction value does not exceed rupees one crore, is not material etc. The failure to seek ratification of the audit committee can render the transaction voidable at the option of the audit committee and if the transaction is with a related party to any director, or is authorised by any other director, the director(s) concerned shall indemnify the listed entity against any loss incurred by it. Audit committee can grant omnibus approval for RPTs to be entered by its subsidiary in addition to listed entity subject to the certain conditions.
Exemption for RPTs in the nature of payment of statutory dues, statutory fees or statutory charges entered into between an entity on one hand and the Central Government or any State Government or any combination thereof on the other hand or transactions entered into between a public sector company on one hand and the Central Government or any State Government or any combination thereof on the other hand.
Scale based threshold for determining material RPTs ranging from minimum of 10% of annual consolidated turnover to Rs. 5000 crore based on the consolidated turnover of the HVDLE.
Prior approval of the audit committee of the listed entity required for a subsidiary’s RPTs above Rs. 1 crore if it exceeds the lower of 10% of the annual standalone turnover of the subsidiary (or 10% of paid-up share capital and securities premium, if no audited financials of at least one year) or the listed entity’s material RPT threshold under Regulation 23(1) of LODR.
Omnibus shareholder approvals for RPTs granted at an AGM shall be valid up to the next AGM held within the timelines prescribed under Section 96 of the Companies Act, 2013 (currently maximum 15 months), while such approvals obtained in general meetings (other than AGMs) shall be valid for a maximum of one year
The most critical point that remains pending to be addressed is the nature of disclosures to be made before the audit committee and shareholders while approving RPTs – as to whether the existing disclosure requirements as per Chapter VIII of SEBI Master Circular dated July 11, 2025 will apply or the threshold based disclosure requirement as applicable to equity listed companies i.e. disclosure as per Annexure 13A of SEBI Circular dated October 13, 2025 for RPTs not exceeding 1% of annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity or ₹10 Crore, whichever is lower, and disclosure as per ISN on Minimum information to be provided to the Audit Committee and Shareholders for approval of Related Party Transactions for RPTs exceeding the aforesaid limit. Considering that HVDLEs will be proceeding with obtaining omnibus approval for RPTs proposed to be undertaken during FY 2025-26, in the absence of any clarification or amendment in the Master Circular, the HVDLEs will continue to follow the existing disclosure requirements.
Other amendments
Recommendations of board to be included along with the rationale in the explanatory statement to shareholders’ notice [Reg 62D(17)/ Reg 17(11)]
Exemption from shareholders’ approval requirements for sale, disposal or lease of assets between two WoS of the HVDLE [Reg 62L (6)/ Reg 24(6)]
Minor terminology changes from year to financial year, income to turnover etc.
Disclosure requirement of material RPTs in quarterly corporate governance report omitted. Format and timeline of period CG compliance report to be prescribed by SEBI [Reg 62Q(2)/ Reg 27(2)]
VKCO Comments: For equity-listed entities, reporting on compliance with corporate governance norms are a part of Integrated Filing – Governance, required to be filed within 30 days from end of each quarter. The move to provide flexibility to SEBI in prescribing timelines for corporate governance filings may be in order to extend the applicability of Integrated Filing requirements to HVDLEs as well.
Conclusion
While the present amendment strictens the compliance requirement for the HVDLEs with outstanding listed debt securities of Rs. 5000 crore or more, it also provides the ease of compliance as provided for certain matters to equity listed companies. The actionable for HVDLEs will be mainly amending the RPT policy to align with the amended requirements, evaluate the eligibility of the existing secretarial auditor in the light of amended requirements. The entities that cease to be HVDLEs can evaluate the need to retain the committees and policies, in the light of applicable laws.
ROCs uncovering SBOs through publicly available information
– Pammy Jaiswal and Darshan Rao | corplaw@vinodkothari.com
Introduction
The framework for SBO identification can be traced back to the recommendations of the Financial Action Task Force (FATF), a global watchdog for combating money laundering and terrorist financing. Section 90 of the Companies Act, 2013 (‘Act’) read with its Rules translates the recommendations into provisions for enforcing the concept, with two broad manners of identification methods. The first being the objective test where the shareholding is picked up through the layers to see the type of entity and the extent of holding to identify the SBO for the reporting entity. The second is the subjective test where the aspects of control and significant influence are evaluated from all possible corners to reach the SBO. It is generally seen that the objective test is the most common way for SBO identification, however, in most of the cases where the regulator has made the identification, it has held the hands of subjectivity. As a follow-up to the LinkedIn case[1], we have discussed a few other rulings where the RoC has taken diverse ways under the subjectivity armour to reach out to the SBOs. The article also explains the principles of law that emerge from every case law, giving a broader angle to the readers on the ever evolving corporate governance norms in the context of SBO identification.
Some of the aspects via which SBOs have been identified in the rulings discussed in this article are as follows:
Control over the Board of the listed overseas parent
CEO in relation to and not only of the Pooled Investment Vehicle
Financial dependence and control established via usage of common domain name
Erstwhile promoters obligation to disclose where the new promoters are exempt for the then time period
We have discussed these in detail in the following paragraphs to inform the way RoCs went on a spree to unearthen the SBOs taking shields of the language of the existing legal provisions around SBO identification.
Subjectivity facets for SBO identification
As discussed above, the two broad subjective tests for SBO identification are right to exercise or the actual exercising of significant influence or control over the reporting entity. It is imperative note the relevance of stating both the situations as a potential to become SBO for the reporting, being:
Right to exercise significant influence or control [note here that actual exercise is not a prerequisite]; or
Actual exercising of significant influence or control.
Further, it is pertinent to note that ‘control’ has been defined under Section 2(27) of the Act to “include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.
Again, the term ‘significant influence’ has been defined under Rule 2(1)(i) of the SBO Rulesas the “power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies”.
In the following parts of the article, we will be able to know, the manner in which these aspects have been investigated to reach out for the SBOs.
A. Examining cross holdings, chairmanship and other publicly available data[2]
The Indian reporting entity was a WoS of an overseas listed entity which was a large conglomerate and hence there were several cross holdings in the entities in the top level. There was no declaration of SBO in the given case on account of the argument given that the holding entity is a listed company and hence, there is no individual holding control or significant influence over the said parent. Enquiry was made about the details of the promoters, directors, KMP and shareholders of certain promoter entities as well as chairperson of board meetings and UBO for the reporting company.
Further, upon investigation into the public records of the holding entity, it was found that one particular individual from the promoter category along with his family holds approx 21.46% in the ultimate parent entity and that his son significant stake in two other promoter group entities which in turn holds in the ultimate parent entity of the reporting company.
RoC concluded that the son along with his family members, directly and indirectly exercises significant influence in the ultimate parent. Further, the same person also holds the position of a chairperson in the said entity when the said company already has a full-fledged chairperson already indicating a situation of proxy control through legally remote mechanism. Accordingly, he should have been declared as SBO for the reporting company in India. The snapshot of holding is given below:
B. Individual manager/ CEO related to Pooled Investment Vehicle and not necessarily of the Investment Vehicle[3]
In cases where the SBO is identified via the members holding the reporting company and the ultimate shareholder as such is a pooled investment vehicle, in that case even if there is no individual as a general partner or the investment manager or the CEO of such vehicle, then any individual in relation to the pooled investment vehicle and not necessarily of such a vehicle can be regarded as an SBO. In this case the CEO of the investment manager was considered as an SBO since he was the one responsible for the decision making of such investment manager and hence, relevant for investment decisions of the vehicle.
While arriving at the conclusion of this ruling, RoC clearly indicated that the legislative scheme of Section 90 ensures that at the end of every ownership chain, a natural person(s) must be identifiable as the SBO. Companies cannot rely on the complexity of foreign fund structures or the absence of direct nominees to evade compliance; the obligation to investigate and file BEN forms lies squarely on the Indian company. The ROC implicitly aligned Indian law with FATF Recommendations 24 and 25[4], emphasizing that beneficial-ownership disclosure extends through investment vehicles, LLPs, and trusts
C. Financial / Business Dependency, Usage of common domain name, KMPs of foreign parent employed in Indian reporting company[5]
In a very interesting case where 100% of the shares were only held by a few individuals, RoC concluded that even in such entities identification of SBO is still possible on account of assessment of several factors. These include the reporting test as well as financial control test. In such cases, one may consider evaluating the business dependency in terms of supply to or from the reporting entity, other clues like entities with a common domain name, similarity in trademark, procurement policies.
In this case it was investigated and consequently observed that the shareholder of the reporting company held a controlling stake in the overseas supplier entities on which the reporting company had the highest dependency. Further, the RoC also found out that both the reporting company and these supplier entities had applied for a similar trademark. Further, these entities were reported to be under the common control of an individual who happens to be the director as well the majority shareholder of the reporting company. It is also imperative to note that one of the director-cum senior employees and another senior employee are the ones who have been shown as the supervisor and UBO for the overseas supplier entities.
In this ruling, RoC also referred to the FATF Guidance[6] on control in cases with no shareholding. It includes the following means:
Control through positions held within a legal person: Natural persons who exercise substantial control over a legal person and are responsible for strategic decisions that fundamentally affect the business practices or general direction of the legal person may be considered a beneficial owner under some circumstances. Depending on the legal person and the country’s laws, directors may or may not take an active role in exercising control over the affairs of the entity.
Control through informal means: Furthermore, control over a legal person may be exercised through informal means, such as through close personal connections to relatives or associates. Further, when an individual is using, enjoying or benefiting from the assets owned by the legal person, it could be grounds for further investigation if such individual is in the condition to exercise control over the legal person.
D. Current exemption gets overruled by past obligation to declare[7]
ROC held clearly in this case that the current holding structure even though exempt from the disclosure requirements pursuant to Rule 8 of the SBO Rules, the same will still be subject to penal actions where the declaration was not made as and when applicable in the period prior to qualifying for such exemption.
Concluding Remarks
On perusal of each of these rulings, it becomes clear that no matter how complicated or how simple the corporate structure is, the regulators will leave no stone unturned while carrying on their investigation for finding the real SBOs. Regulators have the determination to uncover SBOs who exercise control behind every legal entity.
A few measures that can be adopted include establishing robust frameworks to continuously track changes in shareholding and control arrangements, maintaining detailed documentation of every ownership and control analysis conducted and filing all SBO disclosures promptly with the Registrar of Companies (RoC). It is also imperative that suitable amendments are made to define the ‘ultimate beneficial owner’ (UBO) rather than the ‘significant beneficial owner’. To some extent, this can be helpful to those corporations with several layers of entities to identify the UBO, although the process would lose its viability considering the scale and extent of tracing.
However, the concern that remains is that the exercise to trace the origins of relationship may prove to be an onus on entities apart from the penal consequences it carries in case of non-compliance.
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As a part of the RBI’s recent consolidation exercise, RBI has released Draft Reserve Bank of India (Commercial Banks – Governance) Directions, 2025. This exercise integrates decades of existing circulars into a streamlined framework, enhancing clarity and ease of governance. While primarily a consolidation, the RBI has undertaken extensive clause shifting, reorganisation, and pruning of redundancies to improve accessibility. Further, new provisions have been introduced for Private Sector Banks (PVBs) in line with the Discussion paper on Governance in Commercial Banks in India dated 11th June, 2020 or in alignment with the provisions applicable to Public Sector Banks (PSBs). Below are some of the key highlights from this consolidated framework for PVBs:
1. Additional disqualifications for Fit and Proper Criteria
The Draft Directions specify additional disqualification conditions for a person proposed to be appointed as a director in a PVB. These include:
Common directorship with a Non-Banking Financial Institution (NBFI) or
Association of the proposed candidate with such institutions in any other capacity.
The institutions engaged in the following activities are covered by the said restriction:
finance,
investment,
money lending,
hire purchase,
leasing,
chit / kuri business,
Mutual funds,
Asset Management Companies and
other para-banking companies.
The term “NBFI” has not been used in the Draft Directions, however, taken from the 2020 Discussion Paper. The 2020 Discussion Paper permitted common directorship with NBFIs subject to certain conditions, and defined NBFI as:
Non-banking financial institutions (NBFI) are entities engaged in hire purchase, financing, investment, leasing, money lending, chit/kuri business and other para banking activities such as factoring, primary dealership, underwriting, mutual fund, insurance, pension fund management, investment advisory, portfolio management services, agency business etc.)
The scope of restriction under point (b) is wider, and covers association “in any other capacity”. However, directorship is permitted in such cases, subject to compliance with certain conditions, viz.,
The institution does not enjoy any financial accommodations from the concerned PVB;
Person does not hold whole time appointment in the institution; and
The person does not have substantial interest’ in the institution as defined in Section 5(ne) of the Banking Regulation Act, 1949.
Note that the meaning of “institution” itself is vast, and covers, incorporated and unincorporated entities including individuals.
The proposed inclusion is also in partial alignment with the condition specified in fit and proper criteria for PSBs that states:
A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities shall not be considered for appointment as elected director.
2. Clarity w.r.t. the role of Board, EDs and NEDs
The 2020 Discussion Paper had elaborate discussion on the role of the board of the banks, primarily drawing reference from the Basel Committee on Banking Supervision Guidelines of 2015, in addition to the existing requirements specified through various circulars.
The Draft Directions further sets out the expectations from the MD/ CEO/ WTDs vis-a-vis NEDs, alongside the role of board.
Para 51 and 52 of the Draft Directions specifies role of the board, which includes:
Conduct affairs in a solvent, adequately liquid and reasonably profitable manner
Ensure that the Memorandum and the Articles of Association spell out the duties, functions and obligations of the directors towards the PVB
Institutionalise discussions between its management and the Board on quality of internal control systems
Set and enforce clear lines of responsibility and accountability for itself as well as the senior management and throughout the organization.
For NEDs, Para 52 & 53 of the Draft Directions sets out the expectations from the NEDs, including areas that NEDs should pay particular attention to. Para 54 further provides various positive and negative stipulations, some of which are stated below:
Negative stipulations
Positive stipulations
not be an employee of the PVB.
have no power to act on behalf of the PVB
nor can they give any direction to the employees of the PVB on behalf of the management.
desist from sending any instructions to the individual officers on any matters and such cases, if any, shall be routed through the MD&CEO / CEO of the PVB.
exercise power only as a member of a collective body, unless specifically authorised by a Board resolution,
not sponsor any individual proposal, nor shall they approach directly the Branch Managers to sanction loans or other facilities to any constituent.
not sponsor individual cases of employees or officers regarding their recruitment, transfers, promotions, postings and other related matters.
act with ordinary person’s care and prudence
disclose the nature of interest to Board wherever directly or indirectly interested or concerned in any contract, loan, arrangement or proposal entered/ proposed to be entered and not to vote on any such proposal [similar to sec. 184 of CA]
As regards CEO & MD/ CEO/ WTDs, Para 56 of the Draft Directions state that they should act as a bridge between the board and management. They are charged with the responsibility of efficient management of the bank on behalf of the Board. It is through them that the programmes, policies and decisions approved by the Board are made effective and again it is through them that the Board gets the responses and reactions of those at various levels of the organisations to its deliberations.
A mapping of the various provisions of the Draft Directions as applicable to PVBs vis-a-vis the existing applicable circular setting out such requirements can be accessed here.
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Cross-border merger, specifically outbound merger, may be considered as a means of promoting cross-border investments by India. Outbound mergers involve transfer of the assets and liabilities of an Indian company into an overseas company, thus, leading to the resultant company being an overseas company, albeit, with shareholders of the transferor Indian company. Like a bird leaving its nest, an outbound merger denotes an Indian company’s departure from its domestic regulatory shelter to establish its identity under foreign skies.
While these act as growth levers allowing businesses to tap into new geographies, access global customers, and advanced technologies; from a regulatory standpoint, these are complex arrangements, governed simultaneously by corporate, foreign exchange, and tax laws, making them highly regulated corporate actions.
THE DAWN OF OUTBOUND MERGERS IN INDIA
While the foreign giants were allowed to touchdown the Indian market, India’s regulatory framework maintained a rather protective stance – securing homegrown businesses by keeping outbound mergers off the table while tightly managing foreign exchange. With time the laws evolved and the realization that further growth required a visa was acknowledged. In December 2017, notification of Section 234 in Companies Act 2013 gave due recognition to outbound mergers. This move was followed by the RBI’s introduction of FEMA Cross Border Merger Regulations 2018, a comprehensive set of rules which dealt with cross-border mergers holistically[1].
OUTBOUND MERGER vs OUTBOUND ACQUISITION
In India, cross-border activity has been long dominated by inbound mergers and outbound acquisitions with outbound mergers continuing to be a rarity[2].
Even before 2017, when the Indian law did not permit outbound mergers– what was always possible was an outbound acquisition. Indian companies have often preferred outbound acquisitions over outbound mergers — a route that achieves similar strategic goals while bypassing the regulatory complexities of cross-border merger approvals. Media reports[3] indicate that in 2024, India saw about 120 outbound acquisition deals worth $17 billion. By August 2025, nearly 100 deals worth $11 billion have already been executed, showing strong momentum.
The difference lies in the fact that an outbound acquisition allows an Indian company to buy shares or assets of a foreign company under the FEMA ODI route, maintaining the foreign company’s legal status, only changing its ownership. In contrast, in case of an outbound merger, an Indian company merges into a foreign company, transferring all its assets and liabilities to such foreign entity, thereby losing its existence in India.
PROCEDURAL ASPECTS
Translating the legal permission into practice, the process demands navigation through a web of interlinked legal regimes. Outbound merger involves not just selecting a suitable foreign company for merger but exercising due care to understand the regulatory aspects, the political as well as tax scenarios of the jurisdictions involved.
1. Jurisdictional Eligibility
The first thing to be ascertained, in case of an outbound merger, is if the foreign Company is incorporated in an eligible jurisdiction.Annexure B to Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lays down the following jurisdictions as eligible:
whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or
whose central bank is a member of Bank for International Settlements (BIS), and
a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as:
a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
2. Valuation and Due Diligence
While the negotiations and dealings are underway, Rule 25A(2b) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 requires the transferee company to ensure that valuation is conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under Rule 25A(2a)
3. Approvals – Scheme placed under the critical lenses of RBI, shareholders, creditors and ultimately NCLT
An ambition like an outbound merger requires not just a robust strategy but most importantly a positive nod from RBI, NCLT, shareholders and creditors of the entities involved in the scheme. Further, compliance with the approval requirements under the applicable laws in the jurisdiction of the foreign transferee company is also to be ensured.
A. RBI Approval:
Cross-border mergers are closely linked with foreign exchange management and capital movement. As the watchdog of the financial system, RBI ensures that these restructurings do not result in undue capital flight or financial instability. Rule 25A(2a)of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 mandates that a company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B, as discussed above, after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Act and these rules
FEMA (CROSS-BORDER MERGER) REGULATIONS, 2018– harbinger of cross-border business
Notified vide notification no. FEMA 389/ 2018-RB dated 20th March, 2018, these Regulations provide that if the merger transaction is in compliance with these Regulations, it shall be deemed to have been approved by RBI. In cases of deemed approval of RBI, the Regulations require a certificate from the Managing Director/Whole Time Director and Company Secretary, if available, of the company(ies) concerned ensuring compliance to these Regulations to be furnished along with the application made to the NCLT. However, on a practical front, in the author’s view, the avenue for deemed approval may not suffice and NCLT benches may require an explicit approval of RBI.
Major provisions dealt with by the said Regulations-
Issue of Securities – . For the securities being issued by the resultant foreign company to persons resident in India, the acquisition should be compliant with the FEMA (Overseas Investment) Rules & Regulations, 2022.Where the ODI falls within the limits prescribed (currently up to 400% of net worth in most cases), it can be made under the automatic route. If limits are exceeded or the sector falls under the “prohibited” list, RBI approval is required.
Now, in case of a shareholder being a resident individual, the fair market value of foreign securities should be within the limits prescribed under the Liberalized Remittance Scheme (which presently stands at USD 250,000 per financial year).
Principal/branch offices or manufacturing unit situated in India– Any office of the transferring Indian company in India will be treated as a branch of the resulting foreign company and must comply with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, including any applicable activity restrictions for branch offices.
Borrowings and Guarantees- Any guarantees and borrowings of the transferor Indian company to be repaid as per the terms of the scheme sanctioned by the NCLT.
Transfer of Assets –Any asset or security which is not permitted to be acquired or held under FEMA guidelines should be disposed of, repatriated, or dealt with as per the regulations within two years from the date of sanction by the NCLT.
Bank Account-The foreign resultant company can maintain a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for up to two years to settle Indian obligations.
B. Other Regulatory Approvals
Sector specific regulators like SEBI in case of listed companies are required to be sought. Notice of the merger along with the proposed scheme are served to these regulatory bodies and their representations/objections are given due consideration.
C. Approval of the Shareholders and Creditors of the parties to the scheme
The merger proposal requires approval of majority shareholders representing 3/4th in value as well as from the creditors of the parties to the scheme at their meetings held for this purpose. They are entitled to receive notices and provide their consent or object to the scheme as per provisions of the Companies Act.
D. NCLT Sanction
NCLT serves as the ultimate legal authority to ensure that the Indian company’s integration with a foreign entity is done in a manner consistent with national and international regulatory requirements and in the interests of all concerned.
Section 234 read with rule 25A(2)(a) gives recognition to cross-border mergers by extending the provisions of Sections 230 to 232 of the Companies Act tooutbound mergers.
E. Approval Requirements in the Foreign Jurisdiction
In addition to the approval requirements mentioned hereinabove, the approval requirements as per the laws of the foreign jurisdiction is also required to be ensured.
TAXATION IMPLICATION IN CASE OF OUTBOND MERGERS
In case of outbound merger, as discussed above, the assets and liabilities of an Indian amalgamating company will get transferred and vested into a foreign amalgamated company. A potential concern in such a scenario is whether at all such arrangements will also be treated as tax neutral under Income Tax Act, 1961?
Under the current provisions of the Income Tax Act, 1961, tax neutrality has been specifically provided only in respect of mergers where the amalgamated company is an Indian company. Section 47 of the Income Tax Act exempts certain transfers from capital gains tax, including transfers of capital assets in a scheme of amalgamation, provided that the amalgamated company is an Indian company. In the case of an outbound merger, this condition is not fulfilled since the amalgamated company is a foreign entity. Consequently, the transfer of assets by the Indian amalgamating company to the foreign amalgamated company may be treated as a taxable transfer, potentially attracting capital gains tax in India.
Further, the shareholders of the Indian amalgamating company who receive shares of the foreign amalgamated company in exchange for their Indian shareholding may also be subject to capital gains tax, since the exemption under section 47(vii) applies only where the amalgamated company is an Indian company.
Although the Companies Act, 2013 and FEMA regulations now facilitate outbound mergers (subject to RBI approval), the Income Tax Act has not yet been amended to provide explicit tax neutrality for such transactions. Therefore, unless specific exemptions are notified, outbound mergers may result in significant tax costs both for the amalgamating company and its shareholders.
CONCLUSION
While the regulatory framework under the Companies Act, 2013 and FEMA has paved the way for outbound mergers by providing legal recognition and procedural clarity, the absence of corresponding tax neutrality under the Income Tax Act, 1961 remains a significant bottleneck. Unless specific tax exemptions or clarificatory amendments are introduced, the potential incidence of capital gains tax on both the amalgamating company and its shareholders, coupled with other tax exposures, may act as a major deterrent for cross-border restructuring involving Indian entities. For outbound merger provisions to achieve their intended objective of facilitating global business integration and ease of doing business, a harmonized tax regime will be crucial. Addressing these tax hurdles will not only encourage Indian companies to pursue international expansion through mergers but also enhance India’s competitiveness as a jurisdiction supporting outward investments.
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The position of a compliance officer is a reflection of challenges. As much as the individual holding this position enjoys reputation and superintendence, there is a constant expectation from regulatory authorities of ensuring compliance and active enforcement of the law. In the context of PIT regulations, SEBI does not expressly specify the extent of a Compliance Officer’s role(hereinafter referred to as CO) in supervising a particular compliance; however, various adjudication orders throw light on the expectations from CO. In recent cases, the regulatory watchdog has held the CO, amongst others, liable for lapses in complying with the PIT regulations, whereas in some cases, it has exonerated the CO from any liability imposed by default, owing to its superlative position in the company. The article delves into the nuances of the role of a CO, aiming to propose a clear, definitive line of duty to be observed and appreciated by the SEBI during instances of violation of this law.
2. Identifying a CO- SEBI (PIT) Regulations 2015
Reg 2(1)(c) of the SEBI (PIT) Regulations defines a Compliance Officer as: 1. Any senior officer, designated so and reporting to the board of directors 2. A financially literate person capable of deciding compliance needs. 3. A person responsible for compliance with policies, procedures, maintenance of records, and monitoring adherence to the rules for the preservation of:
Unpublished price-sensitive information (hereinafter referred to as UPSI)
Monitoring of trades, and
The implementation of the codes specified in these regulations is under the supervision of the board of directors of the listed company.
It is to be noted that the definition gives way for any senior officer to be a compliance officer to perform obligations[1] stated in the following segment. The SEBI had also noted in a matter that the interim company secretary of a company who has not been appointed as the compliance officer under PIT during the UPSI period cannot be forthwith held liable.[2] The above duties (monitoring, implementation, maintenance, etc) are, though explanatory of the role of a compliance officer, not definitive or fenced in form and substance. The SAT held in a case that a CO cannot be blamed for disclosures under the above regulation, of board-approved misstatements.[3] Relevant extracts are given below:
“The Compliance Officer works under the direction of the Board of Directors of the Company. It was not open to the Compliance Officer to comply with Clause 36 of the Listing Agreement. At the end of the day, the Compliance Officer is only an employee of the Company and works on the dictates and directions of the management of the Company. Thus, when the entire management is being penalised, it was not open to the AO to also book the Compliance Officer for the said fault.”
Now this brings us to the question as to the actual duties and obligations of a CO, and its viable extent to avoid stretched expectations. There cannot be a straight-jacket formula, as this depends on the nature of the violation of a particular category of regulations under SEBI PIT.
3. Responsibilities of a CO – SEBI (PIT) Regulations 2015
Before proceeding to the liabilities of a CO, it is important to delineate the main obligations of a CO as per SEBI (PIT) Regulations. These are given below:
Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations [Reg 9(3)].
The CO must review the trading plans submitted by designated persons. For doing so, he can ask them to declare that he does not have UPSI or that he must ensure that the UPSI in his possession becomes generally available before he commences his trades [Reg 9(3)]. The CO shall report to the board and shall provide reports to the Chairman of the Audit Committee, or to the Chairman of the board at such frequency stipulated by the board, being not less than once a year [Reg 9(3)].
All information shall be managed within the organisation on a need-to-know basis, and no UPSI shall be conveyed to any person except in furtherance of legal duties, subject to the Chinese wall procedures [Reg 9(3)].
When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds [Reg 9(3)].
The timing for re-opening of the trading window shall be determined by the CO, upon considering several factors, including the UPSI becoming generally available and being capable of assimilation by the market, which shall not be earlier than forty-eight hours after it becomes generally available [Reg 9(3)].
Before approving any trades, the compliance officer shall seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI. He shall also have regard to whether such a declaration is capable of being inaccurate. The compliance officer shall confidentially keep a list of certain securities as a “restricted list”, which shall be the basis for reviewing applications for pre-clearance of trades [Reg 9(3)].
These are some of the duties specified in the Regulations. However, the extent of liability of the CO arising from the aforesaid duties requires determination.
4. Potential liabilities of CO:
To determine the extent of obligations of a CO with respect to disclosures, records, or any compliance, there is a need to segregate the duties of a CO into specific categories crafted according to the several aspects to be considered while ensuring adherence to the PIT regulations. In this direction, an effort has been made below:
Closure of Trading window:
A CO cannot be held responsible for not closing the window for certain traders, if the UPSI was not disclosed by the designated person or if the person executed a trade much before the UPSI becomes generally available, in contravention of the trading plans approved or if the disclosure was concealed inadvertently by the board[4].
A CO can also not be held liable if an insider trades in the securities of the company with UPSI, without obtaining pre-clearance from him, even after asking the person to disclose UPSI. He cannot claim that he did not close the trading window on the grounds of lack of awareness of a demand notice received from an operational creditor, which was the start date of UPSI, upon being disclosed to the stock exchange.[5]
So, it is important to understand that a Compliance Officer is not expected to possess perfect foresight, but to exercise prudent diligence. When the trading window is closed in good faith, established procedures are adhered to, and no proof of negligence or systemic failure exists, regulatory liability cannot be imposed on a CO merely on the basis of retrospective evaluation of his inherent duty[6]. He must tend to certain nuances (such as whether the issue of ESOPs is permissible during the window closure)[7], and employ the best professional judgment to red-circle information as UPSI to ensure effective closure of the trading window without breaches.[8]
Maintenance of structured digital database (SDD):
A CO can be held liable for not maintaining SDD as per Annexure 9 of the guidance note on insider trading. However, the SDD must be “real-time and tamper-proof”. The CO would not be held liable if no particular system/controls existed, such as an audit trail mechanism to secure the SDD and prevent leaks. However, citing delay in procurement of software, accidental omissions[9] or the lack of manpower to scrutinise bulky entries of transactions[10] cannot be regarded as valid arguments by a CO.
It is also pertinent that the CO of a listed company adheres to the standard operating procedure for filing the SDD certificate with the stock exchange within a particular deadline. Failure to do so shall attract the following actions by the exchange within 30 days from the due date of filing the SDD certificate: a. Display the name of the company as “non-compliant with SDD” and the name of the compliance officer on the SE website; b. No new listing approvals will be granted (except for bonus issue and stock split); among other actions.[11]
Verifying documents given by the Board:
The SAT has held in the appellate order of V Shanker vs SEBI, taking reference from the case of Prakash Kanungo, that compliance officers are not responsible for re-auditing board-approved documents related to any information on securities, transactions, etc, to test their financial literacy[12]. As seen in the definition, a CO shall work under the supervision of the board and cannot question the decisions of the board. Ergo, he cannot be held liable for making invalid, board-approved disclosures per Reg 7 of the regulations.
Trading by designated persons: Granting of Pre-Clearance and Contra trade restrictions
Pre-clearance becomes a mandatory action in cases where a trading plan has not been submitted/approved by him. The CO must ensure that no designated person executes a trade after expiry of 7 days from the date of granting pre-clearance [13] and must consider the possibility that the declaration given by the person may turn inaccurate.
Prima facie, it is important that the CO can effectively assess and discern a piece of information as UPSI, and the possibility of traders possessing UPSI, before giving a nod. The SEBI has held that a CO is expected to comprehend that the materiality of an event lies not only in its price tag but in its ability to shape market perception. He can be held liable if he limits his view to on-record numerical data, and not the quantum of the event.[14] For instance, the knowledge related to setting up a branch in a higher strategic area amounts to UPSI, and if clearance was granted to those in possession thereof, the CO will be penalised for lack of diligence.[15] Furthermore, his inaction is tagged as dereliction of duty when he couldn’t foresee a contra trade by a person who was granted pre-clearance for “dealing in the shares of the company”, on grounds of being “occupied with work”.[16]
However, a CO cannot be held liable for a bona fide lack of knowledge of the exposure of a Designated person to UPSI on the very date of granting pre-clearance to that person. In such a case, the CO cannot be held responsible for any trade executed by such a person while in possession of UPSI [17], but compelling evidence must be furnished by the CO to back his claim of genuine unawareness.
Finally, it is the core duty of the CO to promptly inform the same to the stock exchange(s) where the concerned securities are traded, in case any violation of Regulations is observed[18]. The CO can take assistance from the chief investor relations officer (CIRO) if it is the company’s discretion to designate two separate persons as CIRO and CO, respectively, for meeting specified responsibilities as to the dissemination of information or disclosure of UPSI[19].
5. Conclusion
A compliance officer is designated as a key managerial person. His role is not one of flawless foresight but of demonstrable diligence. As underscored in Rajendra Kumar Dabriwala v. SEBI[20], the responsibility for compliance must not be burdened on a single individual—it must be embedded within the organisational fabric in the backdrop of PIT regulations. To that end, building a resilient compliance ecosystem can enable a CO to define its limitations effectively while ensuring that inherent obligations are fulfilled with efficiency. This requires adopting formalised Standard Operating Procedures (SOPs), automated monitoring tools, structured checklists[21] for promoters, directors, and intermediaries to map recurring corporate events, and AI-assisted detection of UPSI, among other measures.
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