SEBI says SWAGAT to investors

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– Team Corplaw | corplaw@vinodkothari.com

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

Relaxed norms for Related Party Transactions 

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

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

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

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

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

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

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

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

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

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

Facilitating investments in REITs and InVITs

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

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

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

India Market Access – dedicated platform for current and prospective FPIs

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

Read More:

Relaxed Party Time?: RPT regime gets lot softer

LODR Resource Centre

Relaxed Party Time?: RPT regime gets lot softer

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Team corplaw | corplaw@vinodkothari.com

SEBI board decision for doubling the materiality threshold and make it scalar; lesser RPTs to need ISN details, plus other relaxations 

Highlights:

Following  a 32-pager consultation paper proposing significant amendments to RPT provisions, towards ease of doing business, rolled out by SEBI on August 4, 2025, several amendments have been approved by SEBI in its Board Meeting on 12th September, 2025 and the same will become effective in due course upon notification of the amendment regulations. We briefly discuss the approved changes with our analysis of the same. 

Some of our comments on the proposals, as recommended to SEBI, have also been accepted in the approved decisions. Our comments on the Consultation Paper may be read here. 

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

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

Materiality thresholds as approved in SEBI BM: 

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

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

Our Analysis and Comments 

With the amendments becoming effective, RPT regime is all set to be a lot relaxed, with the absolute threshold for taking shareholders’ approval to be doubled to Rs. 2000 crores. In addition, for larger companies, there will be a scalar increase in the threshold, rising to Rs. 5000 crores. A lot lesser number of RPTs will now have to go before shareholders for approval in general meetings.

In times to come, a multi-metric approach, depending on the nature of the transaction, may be adopted, drawing on a consonance-based criteria as seen in Regulation 30 of the LODR Regulations, thus offering a more balanced and effective approach. See detailed discussion in the article here.

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

Extant provisions vis-a-vis SEBI approved changes

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

  • ‘Material’ is always ‘Significant’: There may be instances where a transaction by a subsidiary may trigger the materiality threshold for shareholder approval, based on the consolidated turnover of the listed entity, but still fall below the 10% threshold of the subsidiary’s own standalone turnover. As a result, such a transaction would escape the scrutiny of the listed entity’s audit committee. This inconsistency highlights a regulatory gap and reinforces the need to revisit and revise the threshold criteria to ensure comprehensive oversight in a way that aligns with evolving group structures and scale of operations. RPTs of subsidiary would require listed holding company’s audit committee approval if they breach the lower of following limits:
    • 10% of the standalone turnover of the subsidiary or 
    • Material RPT thresholds as applicable to listed holding company 
  • Alternative for newly incorporated subsidiaries without a track record: For newly incorporated subsidiaries which are <1 year old, consequently not having audited financial statements for a period of at least one year, the threshold for Significant RPTs to be based on lower of:
    • 10% of aggregate of paid-up capital and securities premium of the subsidiary, or
    • Material RPT thresholds as applicable to listed holding company 

Our Analysis and Comments

For newly incorporated subsidiaries, the Consultation Paper proposed linking the thresholds with net worth, and requiring a practising CA to certify such networth, thus leading to an additional compliance burden in the form of certification requirements.  The SEBI BM refers to a threshold based on paid-up share capital and securities premium, and hence, certification requirements may not arise.  

Further, the Consultation Paper proposed a de minimis exemption of Rs. 1 crore for significant RPTs of subsidiaries, thus, not requiring approval of the AC at the listed holding company’s level. However, the SEBI BM does not specifically refer to whether or not the proposal has been accepted, and hence, more clarity on the same may be gained upon notification of the amendment regulations.

Having said that, there is a need to revise and revisit the list of RPs of subsidiaries that gets extended to the listed holding company, thus attracting approval requirements for transactions with various such persons and entities, where there is absolutely no scope for conflict of interest. A Consultation Paper issued some time back on 7th February 2025 proposed extending the definition of related party under SEBI LODR to the subsidiaries of the listed entity as well. See an article on the same here. However, in the absence of any specific approval of SEBI on the same till date, such proposal seems to have been withdrawn by SEBI.

3. Tiered Disclosures: Balancing Transparency and Burden

Existing provisions vis-a-vis SEBI approved changes 

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

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

In such cases, the disclosures will be required as per the Circular to be specified by SEBI. The draft Circular, as provided in the Consultation Paper, specifies disclosures in line with the minimum information as was  required to be placed by the listed entity before its Audit Committee in terms of SEBI Circular dated 22nd November, 2021 ( subsumed in LODR Master Circular dated November 11, 2024), prior to the effective date of ISN. Upon the same becoming effective, disclosures would be required in the following manner as per LODR: 

Value of transactionDisclosure RequirementsApplicability of ISN
< Rs. 1 croreReg 23(3) of SEBI LODR and RPT Policy of the listed entity (refer FAQs on ISN on RPTs)NA – exempt as per ISN 
> Rs 1 crore, but less than 1% of consolidated turnover of listed entity or Rs. 10 crores, whichever is lower (‘Moderate Value RPTs’)Annexure-2 of CP (Paragraph  4  under  Part  A  of  Section  III-B of SEBI Master Circular dated November 11, 2024)Exempt from ISN, upon notification of amendments 
Other than Moderate Value RPTs but less than Material RPTs (specified transactions)Part A and B of ISN Yes
Material RPTs (specified transactions are material)Part A, B and C of ISN Yes
Other than Moderate Value RPTs but less than Material RPTs (other than specified transactions)Part A of ISN Yes

Our Analysis and Comments 

The approved changes provide further relief from the task of collating a cartload of information as required under the ISN, subject to the thresholds as provided. While the introduction of differentiated disclosure thresholds aims to rationalise compliance, care must be taken to ensure that the disclosure framework does not become overly template-driven. RPTs, by nature, require contextual judgment, and a uniform disclosure format may not always capture the nuances of each case. It is therefore important that the regulatory design continues to place trust in the informed discretion of the Audit Committee, allowing it the flexibility to seek additional information where necessary, beyond the prescribed formats.

ISN: Standardising the way information is presented to audit committees
The whole thrust of the ISN is to harmonise and streamline the manner of presenting information to AC/shareholders while seeking approval.
It is good as a guidance or goal post, but does it have to become a regulatory mandate?
Where the manner of servicing food on the table becomes a mandate, the quality and taste will give precedence to form and mannerism.

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

Existing provisions vis-a-vis SEBI approvals 

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

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

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

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

5. Exemptions & Definitions: Pruning Redundancies

Problem Statement

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

Proposal in CP

The Consultation Paper proposed two key clarifications:

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

Our Analysis and Comments

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

  • The phrasing – “retail purchases from any listed entity or its subsidiary by its directors or its employees key managerial personnel(s) or their relatives, without establishing a business relationship and at the terms which are uniformly applicable/offered to all employees and directors and key managerial personnel(s)” – would have created a potential loophole. As worded, the exemption could be interpreted to cover purchases made on favourable terms offered to directors or KMPs themselves, rather than being benchmarked against terms applicable to employees at large. The intended spirit of the provision seems to be to exempt only those transactions where the terms are genuinely uniform and non-preferential. A more appropriate construction would make it clear that the exemption is intended to apply only where such transactions mirror employee-level retail transactions, not privileged arrangements for senior management.

VKCO Recommendations: We had provided our comments to SEBI on the following lines: 

A minor drafting error has crept in the proposed language: retail purchases from any listed entity or its subsidiary by its directors or its key managerial personnel(s) or their relatives, without establishing a business relationship and at the terms which are uniformly applicable/offered to all directors and key managerial personnel(s). While the first part should refer to directors/ KMPs and their relatives, the second part should continue to refer to ’employees’, to ensure that the terms remain non-preferential, instead of introducing preferential treatment for senior management. 

Approved amendment: The approved amendment, as mentioned in the SEBI BM press release, refers to “terms which are uniformly applicable/offered to all employees” in line with our recommendation above. 

  • Regarding the exemption under Regulation 23(5)(b) for transactions between a holding company and its wholly owned subsidiary, a clarification has been inserted to provide the interpretational guidance that the term ‘holding company’ refers to the listed entity. 

The relevance of the aforesaid clarification would primarily be in cases where the unlisted subsidiary of the listed entity enters into a significant RPT with its wholly owned subsidiary (step-down subsidiary of the listed entity). Pursuant to the aforesaid proposal, as approved, no exemption will be available in such a case. 

Conclusion

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

Our resources on the topic:

LODR Resource Centre


Widening the Net of Fast-Track Mergers – A Step Towards NCLT Declogging

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– Barsha Dikshit and Sourish Kundu | corplaw@vinodkothari.com

Introduction

The recent notification of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025, (‘Amendment’) by the MCA represents a significant move towards further declogging the burden of NCLTs and promoting a more business-friendly restructuring environment. By introducing minor procedural refinements and widening the classes of companies eligible for FTM, the amendments make this route accessible to a larger segment of the corporate sector. 

The fast-track merger (FTM) route was introduced under Section 233 of the Companies Act, 2013 (“the Act”), allowing certain classes of companies to get the schemes approved by Regional directors having jurisdiction over the Transferee Company instead of filing of application/ petition before NCLTs having jurisdictions over transferor and transferee company and getting the same approved after following lengthy proceedings. Basically, the FTM route was designed to ease the burden of NCLTs, with a simplified process and a deemed 60-day timeline for completion, making it a quicker and a more cost-effective alternative.

This article explores the key changes introduced through Amendment, the opportunities they create for faster and more economical reorganisations, and the practical considerations and potential challenges that companies may face while opting for this route.

Additional classes of companies can opt for the fast-track route: 

Section 233 of the Companies Act, 2013 read with Rule 25 of the CAA Rules, 2016, presently allows the following classes of companies to undertake mergers under the fast-track route:

  • Two or more small companies;
  • Merger between a holding company and its wholly-owned subsidiary;
  • Two or more start-up companies;
  • One or more start-up companies with one or more small companies.

Often referred to as the “RD Route” in general parlance, the key features of a FTM, include the elimination of NCLT approval, replaced instead by confirmations/approvals from the RoC, OL, members/creditors representing 90% in value, and lastly an order by the jurisdictional RD confirming such merger. [Read the procedure here]

The key change introduced is to extend the benefit of the RD route beyond the presently eligible companies to include the following additional classes:

  1. Scheme of arrangement between holding (listed or unlisted) and a subsidiary company (listed or unlisted) – regardless of being wholly-owned

Until now, only mergers/demergers between WOS(s) and holding companies were permitted under the existing fast track route. However, pursuant to the recent Amendment, merger/demerger between subsidiaries (not limited to wholly-owned ones) and their holding companies are also allowed under FTM route. This effectively removes the ‘wholly-owned’ limitation and extends the benefit to any subsidiary, whether listed or unlisted.

However, it is worth noting that the fast track route will not be available in cases wherein the Transferor company (whether holding company or subsidiary) is a listed company. That is to say, while subsidiaries can be merged with/demerged into a holding company or vice versa under the fast track route, this is only permissible when the transferor company is not a listed company. 

  1. Scheme of arrangement between two or more Unlisted Companies

Another significant addition is to allow fast track schemes between two or more unlisted companies subject to certain conditions as on 30 days prior to the date of inviting objections from regulatory authorities u/s 233 (1) of the CA, 2013:- 

  1. None of the companies involved should be a section 8 company;
  2.  total outstanding loans, debentures and deposits for each company must be less than ₹200 crores , and 
  3. There must be no default in repayment of any such borrowings. 

All the aforesaid conditions are required to be satisfied on two occasions viz. within 30 days prior to the date of inviting objections from the regulatory authorities u/s 233(1) and on the date of filing of declaration of solvency in form CAA-10. The latter is to be accompanied with a certificate of satisfaction of the conditions above, by the auditor of each of the companies involved, in a newly introduced form CAA-10A, which will form part of the annexure to the respective declarations of solvency. 

It is pertinent to note here that no common shareholding, promoter group, or common control is required between the unlisted companies seeking to merge under this route. In other words, even completely unrelated unlisted companies can now opt for a fast track merger, provided they meet the financial thresholds and other prescribed conditions.

  1. Scheme of arrangement between two or more Fellow subsidiaries

As of now, inter-group arrangements, like schemes between two or more fellow subsidiaries, were excluded from the purview of the FTM route. However, the Amendment now brings schemes between fellow subsidiaries – i.e., two or more subsidiary companies of the same holding company – within the scope of Section 233, provided that the transferor company(ies) is unlisted. Notably, the requirement of being unlisted is applicable only to the transferor company/ies. That is to say, the Transferee Company can be a listed company.

While the amendments have commendably widened the ambit of fast-track mergers to include mergers between fellow subsidiaries and step-down subsidiaries, a regulatory overlap with SEBI LODR framework may still persist. Under Regulation 37 of the SEBI LODR read with SEBI Master Circular dated June 20, 2023, listed entities are required to obtain prior approval from stock exchanges before filing a scheme of arrangement. This requirement is waived only for mergers between a holding company and its wholly-owned subsidiary. 

Given that earlier fellow subsidiaries/ step down subsidiaries were not permitted to opt FTM Route, in an informal guidance, SEBI clarified that this exemption does not extend to structures involving step-down subsidiaries merging into the ultimate parent, thereby requiring compliance with Regulation 37 in such cases. 

Accordingly, while the Companies Act now permits fellow subsidiaries and step-down subsidiaries to utilize the fast-track route, the benefit of exemption from prior SEBI/stock exchange approval may not be available, particularly in cases where the transferee company is listed. Unless SEBI extends the exemption framework, listed entities may still need to follow the standard approval process under Regulation 37, which could offset some of the intended efficiency gains of the FTM mechanism

  1. Reverse Cross-Border Mergers involving Indian WOS of foreign companies

While cross-border mergers are governed under Section 234 of the Act and Rule 25A of the CAA Rules, it is amended to absorb the merger between a foreign holding company and an Indian wholly owned subsidiary, currently covered under sub-rule (5) of Rule 25A, into Rule 25 itself to make the index of companies eligible under the FTM route more comprehensive and complete. 

The additional compliances applicable in such instances are the requirement to obtain prior approval from the RBI, and submission of declaration in form CAA-16 at the stage of submitting application, in case the transferor holding company happens to share a land border with India.

Implications and Potential Practical Challenges

NCLTs are overburdened with the Companies Act cases and IBC cases. As a result, scheme of arrangement cases often receive limited attention and are subject to significant delays. The recent amendments are undoubtedly a step forward in simplifying and accelerating mergers/ demerger processes. However, certain aspects of implementation may give rise to procedural challenges that warrants careful consideration: :

  1. Seeking approval of shareholders and creditors particularly when the transferee company is a listed company

Section 233(1) of the Act requires approval of the members holding 90% of the total number of shares. This threshold has been observed to be onerous, not just practically, but also duly recognised in the CLC Report, 2022, as the requirement is approval by those holding 90%cent of the company’s total share capital and not 90% of shareholders present and voting. This threshold becomes particularly difficult to achieve in the case of listed companies and may significantly delay the approval process, thereby defeating the very objective of fast-tracking mergers.

This was a practical difficulty faced by companies going through this route, as the approving authority i.e. the RDs, of different regions, did not take a consistent approach, some of them warranting compliance with the letters of law. However, with practice it has been observed that obtaining approval of the requisite majority as present and voting is also accepted as sufficient compliance. 

Here, it also becomes important to note that the approval threshold is more stringent in case of FTMs, as compared to arrangements under the NCLT route, which requires a scheme to be approved by three-fourths in majority in an NCLT convened meeting, but the same is again offset by the time and cost involved. 

  1. Scheme where transferor company(ies) / demerging undertaking has immovable properties

The NCLT, constituted under Sections 408 of the Companies Act, 2013, is a quasi-judicial body whose orders carry significant statutory weight and are widely recognized by authorities such as land registrars for purposes like property registration and mutation. Concerns may arise w.r.t. the validity of the RD’s order on such schemes. In this regard, it is to be noted that Regional directors function as an extended administrative arms of the Central Government and orders issued by the RD, are legally on par with those of the NCLT. However, an area of concern remains w.r.t. transfer of immovable property as such a transfer is required to be registered with the local registrars, where practically, RD approved schemes may not be having the same effect as that of NCLT approved scheme.

  1. Deemed Approval within 60 Days

Section 233 (5) of the Act requires RD’s to either approve the Scheme within the period of 60 days from the date of receipt of scheme or to file an application before NCLT, if they are of the opinion that such a scheme is not in public interest or in the interest of the creditors.

The section also provides that if the RD does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme, and the Scheme will be considered as approved. This “deemed approval” mechanism is in line with international practices, where intra/inter-group restructurings are not typically required to undergo intensive regulatory scrutiny, and schemes are considered approved once sanctioned by shareholders and creditors. For instance, the Companies Act of Japan (Act No. 86 of July 26, 2005) and the Companies Act, 2006 (UK) does not require specific approval of any regulatory authority, except in certain specific circumstances. 

It is also important to note that the RD does not have the power to reject a scheme outright. As held by the Bombay High Court in Chief Controlling Revenue Authority v. Reliance Industries Ltd., that the order of a Court itself constitutes an instrument as it results in the merger and vesting of properties inter-se the merging parties. In cases of deemed approval, there seems to be a gap on whether the shareholder and creditor approved scheme is to be itself construed as the instrument of transfer, as there is no explicit approval order of the RD sanctioning the scheme. On the other hand, if the RD believes the scheme is not in public or creditor interest, the appropriate course is to refer the matter to the NCLT. In such cases, the fast-track process effectively resets, and the scheme follows the standard route before the NCLT, potentially undermining the objective of speed and efficiency that the fast-track mechanism aims to achieve.

  1. Power of RD vis-a-vis NCLT

For schemes sanctioned by the NCLT, any amendment or variation thereto can be carried out by making an application to the tribunal, by way of an interlocutory application, and NCLT, after considering the observations of the regulatory authorities, if any, has the power to pass necessary orders. That to to say, for the Schemes originally sanctioned by the NCLT, any amendment thereto will also be done by NCLT and not any other forum. Here, a question may arise as to whether the RD, which is the ultimate authority to approve fast track schemes, has similar power, or it has to refer the application seeking amendments to the schemes originally approved by it to the NCLT?

It is a settled principle of law that the authority having the power to approve, only has the authority to allow changes therein. Thus, in case of FTMs, if schemes are originally approved by RD, application for amendment thereto may also be preferred before the RD, unless, the RD itself is on the opinion that the matter requires consideration by the Hon’ble Tribunal. 

  1. Regulatory Approvals in Case of Cross-Border Mergers

Regulation 9(1) of the FEMA (Cross-Border Merger) Regulations, 2018, provides that mergers complying with the prescribed framework are deemed to have RBI approval. Yet, as a matter of process, notices of such schemes must now be served on all relevant regulators, including the RBI, SEBI, IRDAI, and PFRDA, for their comments or objections. This strengthens oversight but could also lengthen timelines, as companies may need to wait for regulator clearances before giving effect to the scheme.

  1. Administrative Capacity of RD Offices

A further consideration is the capacity of RD offices to process the increased number of cases that the expanded FTM eligibility is expected to generate. While there are nearly 30 NCLT benches handling merger matters across India, there are only seven RDs, each with jurisdiction over multiple states and union territories. The RD already endowed with oversight of conversion of public company into private company, approval in case of alteration of FY, rectification of name, etc., in addition to the widened ambit of FTMs. This concentration of responsibility may create administrative bottlenecks, and timely disposal will be critical to preserve the efficiency advantage of the fast-track route.

Conclusion

The Amendments mark a progressive step towards making corporate restructurings quicker and more efficient by widening the scope of Fast Track Mergers, introducing financial thresholds for unlisted companies, and streamlining procedural requirements. Importantly, a specific clarification has now been inserted to state that these provisions shall, mutatis mutandis, apply to demergers as well, thereby removing any interpretational ambiguity on the subject, modifying the forms as well. If implemented effectively, these changes have the potential to substantially declog the NCLTs while giving companies a smoother, time-bound alternative for reorganizations.

Read more:

Fast Track Merger- finally on a faster track

MCA enabled fast track route for cross border mergers and added additional requirements in IEPF Rules

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

Demystifying Promoter & Promoter Group: A Compilation of FAQs

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Pammy Jaiswal, Partner and Ankit Singh Mehar, Assistant Manager | Corplaw@vinodkothari.com

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SEBI alerts banks to realize fiduciary duties for insider information

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Fiduciary duties of banks in maintaining insider trading controls for shares of borrower companies 

– Pammy Jaiswal and Payal Agarwal | Partner | corplaw@vinodkothari.com 

Background

The SEBI Insider Trading Regulations (‘PIT Regulations’) explicitly rolled out the responsibilities for fiduciaries by amending the regulations in 2015. Subsequrently a separate Schedule C was inserted vide the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 effective from April 01, 2019 which further outlined the responsibilities for fiduciaries. In the context of PIT Regulations, the term ‘fiduciaries’ refers to all such persons who are  get to handle clients’ unpublished information (UPSI) in course of their business operations, such as  bankers, merchant bankers, auditors, ,  law  firms, analysts and consultants [refer Para 3.1. of the Report of Committee on Fair Market Conduct]. 

While banks, because of their role and functions, are likely to have access to UPSI of borrower listed entities, listed banks have two distinct strands of responsibility when it comes to curbing and eliminating insider trading practices. In the first place, since their own securities are listed, the requirements of drawing up internal controls for their Designated Person(s) (‘DPs’) become applicable beside the framing of Code of Fair Disclosure for any sharing of UPSI in a fair and symmetrical manner. The second responsibility comes up as being fiduciaries for other listed entities, being their borrowers. In the course of its dealings with other listed entities, several price sensitive information are shared with a concerned group of employees of a bank which may be price sensitive and unpublished and hence, the list of such borrower entities, and the list of the bank’s officers dealing with such entities,  needs to be drawn up for maintaining the restricted list.

In this article, we have pointed out the unique position of listed banks when it comes to handling UPSI of other listed clients, its relevance, global scenario, judicial precedents and what should be the take and approach for such listed banks while handling UPSI for other such clients.

Uniqueness for banks to have access to UPSI

Banks would usually have a more regular, frequent access of such information about its clients, which may likely be in the nature of UPSI. These may include, for instance, :

  1. Details of all major cash inflows or outflows of the listed entity, since the bank account through which such dealings are done is maintained with such banker
  2. Monthly turnover or performance data is usually shared 
  3. Business projections are shared at the time of sanctioning, monitoring and renewal of financing facilities 
  4. Any stress conditions in the financial position of the listed entity etc.  

The dealing officer for the listed clients would have an early access to such information, and hence, may be considered as ‘insider’, pending a public disclosure of such information by the listed entity. 

The Chairperson of SEBI in his recent speech has also highlighted some purposes for which unpublished information may be shared with banks such as: 

  • Sanctioning credit facilities – Before such financial entities sanction the credit facilities, it generally gets access to UPSI in the category of financial projections or any other relevant financial data.
  • Debt restructuring & Settlements – During debt restructuring negotiations or repayment settlements, sensitive data on a company’s liquidity position becomes available to the listed financial institutions.
  • Participation in the Committee of Creditors – When such financial institutions participate in the discussion of the Committee of Creditors for restructuring of stressed assets of other listed entities, they become aware of the strategic corporate decisions while they are unpublished.

The information asymmetry and access of UPSI with banks has also been indicated by the Sodhi Committee in the context of setting out principles for sharing of UPSI for due diligence purpose: 

“45. In an ideal world, the information that is generally available about any listed company in the public domain ought to be adequate for any and every investment in its securities. However, that is neither a true position nor a correct expectation is evidenced by even listed companies having to write detailed offer documents and prospectuses for securities offerings such as rights issues and follow-on public offerings. Banks that lend for acquisitions would need to conduct due diligence on a company’s operations…”

While such sharing of UPSI is expected to be for legitimate purposes, however, having access to such information makes it imperative for the listed banks to have concrete and conscious lines of internal control so as to avoid any undue usage of UPSI of listed clients for the gain of such DPs in any manner. 

Identification of Designated Persons while acting as fiduciary 

The identification of DPs in a fiduciary capacity requires designating such persons, who may, on the basis of their function and role in the organization, may be considered to have the ability to or have access to UPSI in relation to the clients of such fiduciary. In the context of a bank in a fiduciary relationship with a listed entity, the select group of persons, identified as DPs, based on their relevant role and functions may involve, for instance: 

  1. Project finance team 
  2. Credit department 
  3. Restructuring department
  4. Legal team etc. 

This implies that all the DPs of the listed bank as identified in its own Code of Conduct for the purpose of its own internal controls need not be included in the list of DPs maintained by the bank against the securities listed out in the restricted list or the grey list. The latter is expected to be drawn up by the listed bank considering the outreach and access of UPSI by its concerned employees in the specific departments of the listed bank.

Bankers as fiduciaries: judicial precedents of putting liability

There have been a few recent instances of insider trading related adjudication by SEBI on listed banks of the country. However, these largely pertain to dealing in the listed scrips of the banks by their Connected Persons, and not necessarily on the failure of fiduciary duties of the banks. Having said that, much of the insider trading regulations in India are built upon its counterparts in other western countries, including the US, UK, Singapore, Australia, etc. The concept principally remains similar across jurisdictions, although the manner of putting controls may vary.  Thus, in the context of fiduciary duties of bankers towards protection of inside information, reference may be made of the decisions of international courts. 

In one of the orders passed by the Financial Conduct Authority addressed to Mr. Ian Charles Hannan, a senior investment banker at JP Morgan was found to have shared information of its client company which was listed on the London Stock Exchange.

In another matter of the Federal Court of Australia in ASIC v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963, one of the employees of the investment bank was found to have dealt in the securities of its listed clients.

In Affiliated Ute Citizens v. United States, 406 U.S. 128, 146 (1972), the Bank was acting as a transfer agent for the sellers. The Bank employees (Gale and Haslem) induced the sellers of the UDC stock to dispose of their shares without disclosing to them material facts that reasonably could have been expected to influence their decisions to sell. Withholding of such information, used by the employees for their personal gains, was considered to be in violation of Rule 10b-5 of the SEC, which prohibits “any device, scheme, or artifice to defraud” in connection with securities transactions. The Court further held that the liability of the bank, of course, is coextensive with that of Gale and Haslem.

In SEC v. Cherif, 933 F.2d 403, 405 (7th Cir. 1991), the matter pertained to an ex-employee, employed in a department dealing with confidential information of the clients of the Bank, using his access card even post his termination of employment to deal in the securities of the listed clients on the basis of material non-public information. The department was engaged in providing financing for extraordinary business transactions such as tender offers and leveraged buy-outs and hence, in the possession of UPSI pertaining to the listed clients of the Bank. The SEC brought civil charges under Rule 10b-5 against Cherif for insider trading, and such charges were affirmed by the Court on the context that as a former employee, Cherif continued to owe the bank fiduciary duties, even after the Bank terminated his employment.

In United States v. Salman, 137 S. Ct. 420 (2016), the Court of Appeals, Ninth Circuit, affirmed the conviction by the jury trial on the grounds that the disclosure of inside information about the clients to the relatives constituted a breach of the fiduciary duty of the employee of Citigroup, acting as an investment banker for such clients  The Court also cited the US SC in Dirks v. SEC, 463 U.S. 646 (1983), which states that: 

The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.

Listed banks should get hyper or hiber(nate) over actionables?

Sensitisation of persons responsible for dealing with UPSI

SEBI Chairperson reiterated the importance of sensitizing the employees of listed banks on their roles and responsibilities as fiduciaries which shall give strength to the internal controls in the entity. In the absence of the above, drawing of internal controls by drafting a Code of Conduct or asking the DPs to seek pre-clerance or putting a trading window and a contra trade restriction, all of these will completely lose their relevance. 

The importance of sensitisation and various means by which sensitisation can be done effectively has been discussed in Sensitization: The key to implementation of PIT Regulations. An effective sensitisation framework is not limited to creating awareness through training only, but extends to a follow-up exercise of evaluating the understanding towards such principles. 

Relevance for fiduciaries to have a process for how and when people are brought ‘inside’ on sensitive transactions

As a part of the Code of Conduct, the fiduciaries are required to have a process for how and when people are brought ‘inside’ on sensitive transactions. This requires sensitising the recipients about their duties and responsibilities with respect to receipt of such information, the manner of dealing with the information and the liability that follows upon the misuse of such information. Further, the effective presence of Chinese walls in a bank also helps to restrict flow of information from one department to the other without having any legitimate purpose. 

Concluding Remarks

In view of the far reaching negative impact of a breach of fiduciary’s duties under insider trading regulations on the capital markets, SEBI has tried to send out an alert call for over ambitious listed banks which may not realize the nature of flaws in this regard of failing as a fiduciary The requirement for a fiduciary to protect and uphold the confidentiality of its clients has been there under the PIT Regulations for approximately a decade. It has been seeking  more and more attention by securing and exhibiting an exclusive mention under the PIT Regulations itself and getting listed companies including listed banks to draw up and implement robust internal controls. 

Read More:

Prohibition of Insider Trading – Resource Centre

Understanding “Undertaking” in the Context of Investment Demergers

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– Barsha Dikshit and Sourish Kundu | corplaw@vinodkothari.com

The meaning of “undertaking” has been one of the most debated issues under Indian company law and tax law, particularly when it comes to shares/investments to be treated as an “undertaking”. While the term intuitively refers to a business or division carried on as a going concern, its application becomes complex when the company’s business primarily consists of holding investments in shares of other entities. This complexity raises important questions about whether such passive investment portfolios can be considered independent undertakings capable of being demerged under Section 2(19AA) of the Income-tax Act, 1961 (now section 2(35) of the Income-tax Act, 2025). 

This article examines  the statutory framework, relevant judicial precedents, and the practical implications of treating investment division as “undertaking” for companies with diverse investment portfolios.

Meaning of ‘Undertaking’

Section 180(1)(a) of the Companies Act, 2013 restricts the Board of a company from selling, leasing, or otherwise disposing of the whole or substantially the whole of an undertaking without shareholders’ approval by way of special resolution. While the provision does not offer a definitional explanation of what constitutes an “undertaking,” it does lay down quantitative thresholds: 

  • An undertaking is one where investment exceeds 20% of net worth or contributes 20% of total income in the preceding financial year.
  • Disposal of “substantially the whole” of such undertaking means disposal of 20% or more of its value.

This numerical test, merely sets quantitative thresholds to determine when shareholders’ approval is required for the disposal of such an asset. 

To understand what constitutes an “undertaking” and, in particular, whether a passive investment division, essentially a portfolio of shares, can independently qualify as an undertaking, reference can be drawn to the definition of “undertaking” provided under the Income-tax Act, 1961 as well as relevant judicial precedents. 

Under the Income-tax Act, 1961, Section 2(19AA) defines the term “demerger”, which requires the transfer of one or more undertakings from the demerged company to the resulting company, such that at least one undertaking remains with the demerged company. The meaning of “undertaking” for this purpose is explained in the Explanation to Section 2(19AA) (now renumbered as Section 2(35) under the Income-tax Act, 2025), as–

“Explanation-1: For the purposes of this clause, “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

This definition emphasizes the need for functional and operational coherence in what is considered an undertaking, ruling out passive asset transfers that lack an identifiable business character. 

The meaning of the term ‘undertaking’ has also been clarified in several judicial precedents. For instance, in the landmark decision of Rustom Cavasjee Cooper v. Union of India [[1970] AIR 564], Hon’ble Supreme Court explained that “‘undertaking’ clearly means a going concern with all its rights, liabilities and assets as distinct from the various rights and assets which compose it… is an amalgam of all ingredients of property and are not capable of being dismembered. That would destroy the essence and innate character of the undertaking. In reality the undertaking is a complete and complex weft and the various types of business and assets are threads which cannot be taken apart from the weft.” 

The Court thus highlighted the holistic nature of an undertaking that it is not a disjointed collection of parts, but a complete and functional enterprise. [See also, P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [[1992] 75 Comp Cas 583 (Bom)].

This brings us to a significant  question: Can a portfolio of shares, held in a company’s books, be regarded as a separate segment or ‘undertaking’? 

This question assumes particular relevance in the context of schemes of arrangement, particularly those involving demergers, where a portfolio of investments is proposed to be transferred to a resulting company. In such schemes, the tax neutrality of the transaction often hinges on whether the transferred segment qualifies as an “undertaking” under the applicable tax laws.

For a unit to be regarded as an undertaking, and for the demerger to be treated as tax-neutral, both the demerged and remaining undertaking must possess the characteristics of a going concern, i.e., each must be capable of independent and sustainable commercial operations with the objective of earning profits. [See: Yallamma Cotton, Woollen and Silk Mills Co. Ltd., In re [[1970] 40 Comp Cas 466]]

This criteria becomes particularly nuanced when the subject of demerger is a mere pool of passive investments, rather than an operational business unit. The key consideration is whether such a portfolio, in itself, demonstrates the organisational integrity, continuity of activity, and profit-making intent sufficient to satisfy the definition of an “undertaking”.

One of the most notable rulings on this issue is the decision of the Income Tax Appellate Tribunal (ITAT) in the case of Grasim Investments Ltd. v. ACIT, wherein the Tribunal was called upon to examine whether a division engaged primarily in holding and managing investments in shares could be treated as an undertaking for the purposes of a tax-neutral demerger under Section 2(19AA) of the Income-tax Act, 1961.

The ITAT held that a mere pool of passive investments does not, by itself, constitute an undertaking. To qualify as an undertaking, the investment division must be more than a collection of financial assets; it must constitute a distinct business activity carried on with a certain degree of autonomy. The Tribunal emphasized factors such as, presence of separate books of account, an identifiable organizational structure, and the existence of management and decision-making functions related specifically to the investment activity and the capability of generating independent business income, to consider a division as an ‘undertaking.

In one of the recent rulings in the matter of Reckitt Benckiser Healthcare India Private Limited v DCIT, 2025 171, dated 18th February, 2025, Ahmedabad ITAT reiterated the principles governing tax neutral merger. 

In this case, the assessee transferred only a portfolio of investments (constituting the so-called “Treasury Segment”) to the resulting company, while retaining the associated liabilities. The assessee attempted to justify this by arguing that the liabilities pertained to other business divisions and not to the Treasury Segment. However, the Tribunal rejected this explanation, holding that such selective transfer is contrary to the statutory mandate. The Tribunal emphasized that for a transaction to qualify as a tax-neutral demerger, it must strictly comply with the conditions prescribed under Section 2(19AA) of the Act. One of the key requirements of which is that all the assets and liabilities pertaining to the transferred undertaking must be transferred to the resulting company.

Treating block of investments as separate undertakings

The real difficulty lies in the case of investment companies, or companies holding multiple blocks of shares in different entities. Can each such block of investments be regarded as a separate undertaking for purposes of demerger?

Here it becomes important to differentiate between active investments and passive investments. For instance, holdings in group companies, such as subsidiaries or associates, may be classified as active investments, given the element of strategic control or influence. On the other hand, investments in mutual funds, debt instruments, or derivatives are typically treated as passive investments, lacking operational involvement.

While judicial decisions have considered active investments as a separate undertaking, investment in mutual funds, securities, or similar financial instruments, when held passively, are typically regarded as individual assets forming part of a company’s investment portfolio , majorly on the ground that they do not, by themselves, represent a business or functional unit capable of independent operation. 

In CIT v. UTV Software Communication Ltd. the Bombay High Court drew a sharp distinction between transfer of shares and transfer of an undertaking. The Court held that a mere transfer of shareholding, even to the extent of 49%, does not amount to a transfer of an “undertaking” under Section 2(42C) of the Income-tax Act, 1961 (now Section 2(103) of the 2025 Act). Relying on the Supreme Court’s rulings in Vodafone International Holdings and Bacha F. Guzdar, it concluded that passive shareholding does not confer ownership of the underlying business and cannot constitute an undertaking for tax or restructuring purposes.

However, the author humbly differs from the view expressed by the Bombay High Court. In the author’s opinion, such matters must be examined in light of the prevailing corporate structures wherein large business groups operate distinct business verticals through separate legal entities, including subsidiaries, joint ventures, and associates. In such cases, transfer of shares in a subsidiary or associate company may, in substance, result in divestment of an entire business segment.

Moreover, as discussed above, section 180(1)(a) of the Companies Act, 2013 provides a quantitative definition of ‘undertaking’ and mandates shareholders’ approval by special resolution for the sale, lease, or disposal of a company’s undertaking. In this context, treating the transfer of shareholding, as a mere transfer of shares and not an undertaking, may arguably be a  narrow interpretation, particularly when the transaction has the effect of transferring operational control and revenue-generating capabilities.

The author’s view also finds support in jurisprudence such as the Grasim Industries Ltd. ruling (Supra), where a financial services division, primarily holding investments in shares and securities, was accepted as a valid “undertaking” for the purposes of demerger under Section 2(19AA) of the Act. 

Conclusion

The concept of “undertaking” in Indian law is broader than a mere division of physical assets; it captures the idea of a self-sustaining business activity. In the context of investments, while passive shareholding may not qualify, an organised investment division with identifiable assets, liabilities, and management can constitute an undertaking capable of demerger. Thus, companies holding multiple investment portfolios may, subject to careful structuring, demerge them into resulting companies under sections 230-232 of the Companies Act and section 2(19AA) of the Income-tax Act.

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Decoding “Control” in Pooled Investment Funds: Manager, Investors, or no one?

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– Sikha Bansal, Senior Partner and Payal Agarwal, Partner  | corplaw@vinodkothari.com 

Corporate relationships and hierarchies are prone to misuse and hence, there are regulatory prescriptions to ascertain and address the areas of conflict. This is usually done through identification of control and/or significant influence, if any, existing between the parties. If there is an element of control /significant influence, the parties may be required to follow a host of protocols – including but not limited to being identified as a promoter, to put in place related party controls, to disclose their  transactions and even go for consolidation of accounts, etc.

While in simple structures, it is still possible to objectively conclude the existence of control/significant influence (or the absence of it); in certain complex structures, particularly where unincorporated entities are involved, the determination can be quite subjective and dependent on multiple factors. For instance, in the case of pooled investment schemes (called “funds” henceforth) like mutual funds, AIFs, ReITs, InVITs, etc., the entity would often be formed as a trust which would hold the common hotchpot of funds contributed by investors. Besides investors, there would be multiple parties involved, viz., the fund sponsor, fund manager, and the trustee. Mostly, the fund may not be a legal entity[1]; however, it is segregated from the funds of either the manager or trustees. If there is any element of control or even significant influence on the funds, by any of these investors/parties, it would necessitate treatment of such funds in accordance with regulatory protocols as discussed above. Further, at the next level, if there is any element of control by such funds on other entities, then there would be concerns around indirect control of investors/parties on such other entities as well, percolating through the fund. Therefore, whether the fund is being controlled or significantly influenced by any person, becomes a pertinent question. 

In this article, we attempt to analyze the same and try to frame some guiding principles for ascertaining circumstances in which a fund would be said to be controlled or significantly influenced. 

Meaning of control

Depending on the specific nature and characteristics, pooled investment funds in India are governed by distinct SEBI regulations, such as, SEBI (Alternative Investment Funds) Regulations 2012, SEBI (Infrastructure Investment Trusts) Regulations 2014, SEBI (Mutual Funds) Regulations 1996, etc. These regulations define the terms “control” or “change in control” in the context of either the sponsor or the manager or both, but not in the context of the fund. Hence, one will have to look towards accounting standards – namely IFRS 10 which sets out guidelines for the assessment of control in the hands of a fund manager. In India, Ind AS 110 replicates the guidance provided under IFRS 10. Detailed discussion on the principles discussed under IndAS 110 is as below.

Components of control

Ind AS 110 refers to three cumulative components of control, viz.,

  1. Power over the investee,
  2. Exposure or rights to variable returns from its involvement with the investee, and 
  3. The ability to use its power over the investee to affect the amount of the investor’s returns.

As evident, the Standard assumes a relationship of investor and investee. In case of funds, while there would be investors; however, the asset manager too, may be required to hold a certain percentage in the fund as skin-in-the-game, pursuant to applicable regulations. Therefore, in the case of funds, the asset manager is also in the position of an investor, besides being in the position of a manager.

Here, it is significant to note that the “existence of power” or “exposure to returns” individually does not indicate an existence of control, unless there is a link between power and returns, that is, the power can be used to direct the relevant activities, which would affect the returns of the investee.

Component of controlTest for existence
Existence of power over the fund Ability to direct the relevant activities, i.e., activities that significantly affect the investee’s returns.
Exposure to or rights over variable returnsPotential to vary investor’s returns through its involvement as a result of investee’s performance
Link between power and returns

Ability to use its powers (of directing relevant activities) to affect the investor’s returns from its involvement with the investee, i.e., the investor shall hold decision-making rights as a principal.  

Also, note that what matters is “ability”, whether there is actual use of such power or not, becomes irrelevant.

As power arises from rights, the investor must have existing rights that give the investor the current ability to direct the relevant activities [para B14]. Such rights have been briefly discussed in the later part of this write-up.

Power to direct relevant activities of the Fund

In the context of a fund, the relevant activity would be the management of the asset portfolio of the fund. The said function is primarily performed by the fund manager, albeit, the same may be in the capacity of an agent to the unitholders. Hence, Para 18 of Ind AS 110 requires a decision-maker to determine whether it is a principal or an agent for the fund, since a delegated power cannot signify control.

Fund manager – a principal or an agent

IndAS requires that an investor with decision-making rights (called as “decision maker”), when assessing whether it controls the investee, shall determine whether it is a principal or an agent. An investor shall also determine whether another entity with decision-making rights is acting as an agent for the investor [para B58]. The investor shall treat the decision-making rights delegated to its agent as held by the investor directly [para B59].

Thus, in cases where the fund manager is acting as a mere agent of the investor (that is, the fund manager is under the control of the investor), the decision-making rights of the fund manager are treated as that of the investor itself, and control is assessed accordingly. Therefore, to say that an investor has control over the fund, it is important to establish that the investor has control over the fund manager, who in turn, is acting as an agent of the investor. Here, whether the fund manager itself is able to control the fund or not also becomes a pertinent point for determination.

Para B60 of Ind AS 110 specifies the factors that need to be considered in order to determine whether the fund manager in its capacity of a decision maker, is merely an agent to the principal (other investors) or exercises its decision-making rights in the capacity of a principal to the fund.

The primary factor, holding the highest weightage, in making such determination – is the kick-out rights available with other investors. However, where the same does not conclude fund manager as an agent, various other factors require consideration.

Determination of fund manager as a principal v/s agent

Determining ‘control’ of the investor

Various tests are relevant for determining the control of the investor over the Fund. A summary view of the same is given below:

The table below shows a detailed analysis of each relevant test for assessing the existence of control:

Sl. No.Test of controlAssessment Remarks
Power to direct relevant activities
1. Nature of rights The nature of rights shall be substantive, i.e., providing an ability to direct relevant activities and not merely protective. Protective rights apply only to protect an investor from fundamental changes in the funds’ activities or in exceptional circumstances and do not imply power over the fund.
2. Majority voting rights

An investor holding more than 50% of voting rights in the fund would generally be considered to have power over the fund, unless such voting rights do not signify substantive decision-making rights.   

Mention is also made of the SEBI Circular dated 8th October, 2024 that requires conducting due diligence for every scheme of AIFs where an investor, or investors belonging to the same group, contribute(s) 50% or more to the corpus of the scheme.

3. Ability to influence other investors into collective decision-makingWhere a right is required to be exercised by more than one party, whether the investor has the practical ability to influence other rights holders into collective decision-making is relevant in assessment of control of the said investor over the fund.
4. Contractual arrangements with other investorsVoting rights as well as other decision-making rights may arise out of contractual arrangements giving an investor sufficient rights to have power over the fund.
5. Size of an investor’s holding relative to size of holding of other parties
  • Significantly high voting rights held by one investor, and
  • Small fragmented holdings by other parties, and
  • Large number of parties required to outvote one investor 

An investor holding substantially higher stake, where other investors are holding fragmented holdings, such that a large number of parties are required to outvote the investor, will give the first investor power over the other investors, even in the absence of majority voting rights.

6. Exercise of voting rights by other investors
  • Absolute size of one investor’s holding is higher than the relative holdings of other investors, and
  • Other investors are passive and do not actively participate in decision-making

Where the stake held by an investor is relatively higher from other investors but not significantly higher to indicate existence of power, however, the other investors do not actively participate in the meetings – the same indicates the unilateral ability of the first investor to direct the relevant activities.

Exposure to, or right over variable returns
7. Dividend and distributable profits proportionate to holdingsThis is directly proportional to the holding of an investor in a fund. Where the holdings of an investor does not comprise a sizable portion of the fund, the same does not indicate a significant exposure to variable returns earned by the fund.
8. Remuneration for servicing the assets and liabilities of the fund

In the context of a fund, the fund manager provides services w.r.t. the management of its assets and liabilities. The remuneration may contain a fixed as well as a variable component, generally, a percentage based fees based on performance of the fund.   However, the same does not indicate an existence of control, if the following elements are present:

  • Remuneration is commensurate with services provided, and
  • Terms and conditions are on arm’s length as per customary arrangements for similar services
9. Returns in other formsIn addition, there might be returns available in other forms providing a right over variable returns of the Fund.

Analysis of examples contained in Ind AS 110

Below, we discuss the examples explained under Ind AS 110 in the context of funds: 

IllustrationFactsAnalysis
13
  • Defined parameters for investment decisions within which fund manager has discretion to invest
  • Fund manager’s stake in Fund – 10%
  • Market based fee for services – 1% of NAV of Fund
  • Assumption that fees are commensurate to services provided
  • No obligation to fund losses
  • No independent board in the fund
  • No substantive rights held by other investors
  • Current ability to direct relevant activities rest with fund manager since no other investor has substantive rights to affect the fund manager’s decision-making authority
  • Variability of returns pursuant to fees and investment does not create significant exposure to classify fund manager as principal  

Fund manager is an agent, so question of holding control does not arise

14
  • Fund manager has decision-making discretion in the best interest of investors and in accordance with governing documents
  • Market based fee for services – 1% of NAV of Fund
  • Profit sharing upon achieving a specified level of profit – 20% of the Fund’s profits
  • Assumption that fees are commensurate to services provided
  • Current ability to direct relevant activities rest with fund manager
  • Variability of returns pursuant to fees and investment does not create significant exposure to classify fund manager as principal  

Fund manager is an agent, so question of holding control does not arise

14A
  • Fund manager has decision-making discretion in the best interest of investors and in accordance with governing documents
  • Market based fee for services – 1% of NAV of Fund
  • Profit sharing upon achieving a specified level of profit – 20% of the Fund’s profits
  • Assumption that fees are commensurate to services provided
  • Fund manager’s stake in Fund – 2%
  • No obligation to fund losses
  • Removal of fund manager – through simple majority vote of investors, but only for breach of contract
  • Current ability to direct relevant activities rest with fund manager
  • Variability of returns pursuant to fees and investment does not create significant exposure to classify fund manager as principal
  • Removal rights with other investors are in the nature of protective rights, hence, not substantive  

Fund manager is an agent, so question of holding control does not arise

14B
  • Fund manager has decision-making discretion in the best interest of investors and in accordance with governing documents
  • Market based fee for services – 1% of NAV of Fund
  • Profit sharing upon achieving a specified level of profit – 20% of the Fund’s profits
  • Assumption that fees are commensurate to services provided
  • Fund manager’s stake in Fund – 20%
  • No obligation to fund losses
  • Removal of fund manager – through simple majority vote of investors, but only for breach of contract
  • Current ability to direct relevant activities rest with fund manager
  • Variability of returns pursuant to fees and investment are substantial for the fund manager to consider personal economic interests in making decisions for the Fund
  • Removal rights with other investors are in the nature of protective rights, hence, not substantive  

Decision-making rights are exercised by the fund manager in the capacity of principal. Variability of returns appears significant to conclude an existence of control. 

14C
  • Fund manager has decision-making discretion in the best interest of investors and in accordance with governing documents
  • Market based fee for services – 1% of NAV of Fund
  • Profit sharing upon achieving a specified level of profit – 20% of the Fund’s profits
  • Assumption that fees are commensurate to services provided
  • Fund manager’s stake in Fund – 20%
  • No obligation to fund losses Independent board in fund
  • Appointment of fund manager – annually through the independent board 
  • Current ability to direct relevant activities rest with fund manager
  • Variability of returns pursuant to fees and investment are substantial for the fund manager to consider personal economic interests in making decisions for the Fund
  • Removal rights with other investors are substantive, since fund manager’s appointment is subject to annual approval of independent board, and can be terminated without cause  

While variability of returns appears significant to indicate control with the fund manager, more weightage is given on substantive removal rights held by other investors. Hence, the fund manager is considered as an agent, and does not control the fund. 

15
  • Investments in fund through both debt and equity instruments
  • First loss protection to debt investors
  • Residual returns to equity investors
  • Assets funded through equity instrument – 10% of the value of the assets purchased
  • Fund manager decision-making within parameters set out in prospectus
  • Market based fee for services – 1% of NAV of Fund
  • Profit sharing upon achieving a specified level of profit – 10% of the Fund’s profits
  • Assumption that fees are commensurate to services provided
  • Fund manager’s stake in Fund – 35% of equity
  • Other investors for remaining equity and debt – large no. of widely dispersed unrelated investors
  • Removal of fund manager – without cause, by simple majority
  • Current ability to direct relevant activities rest with fund manager
  • Variability of returns pursuant to fees and investment, as well as significant exposure to losses on account of equity investments being subordinate to debt investments are substantial for the fund manager to consider personal economic interests in making decisions for the Fund.
  • Removal rights with other investors are without cause, still, not considered substantive, on account of the large number of investors required to exercise such rights.  

Considering the significant level of exposure to variability of returns, the fund manager is considered principal and controls the fund.

16
  • Sponsor establishes a multi-seller conduit
    • Establishes terms of conduit Manages conduit for market based fees (commensurate with services provided)
    • Approves the sellers/ transferors and the assets to be purchased and makes decisions (in best interest of investors)
    • Entitled to residual return
    • Provides credit enhancement (upto 5% of all conduit’s assets, after risk absorption by transferors)
    • Liquidity facilities provided (except against defaulted assets)
  • Transferors sell high quality medium term assets to the conduit
    • Manages receivables on market based service fees
    • Provides first loss protection through over-collateralisation
  • Conduit
    • Issues short term debt instruments to unrelated investors by a conduit
    • Marketed as highly rated medium term asset with minimum exposure to credit risk
  • Investors
    • Do not hold substantive decision-making rights
  • Current ability to direct relevant activities of the conduit
  • Exposure to variability of returns through right to residual returns of the conduit and provision of credit enhancement and liquidity facilities 

Considering the significant level of exposure to variability of returns, the sponsor is considered principal and controls the fund. The obligation to act in the best interests of the investors is not significant.

The “trust” angle

Funds are usually constituted in the form of a trust, where there is an independent trustee. Further, the investment manager is under an obligation to act in a fiduciary capacity towards the investors of AIF, in the best interest of all investors and manage all potential conflicts of interest [Reg 20(1) of AIF Regulations r/w the Fourth Schedule]. In such a scenario, can it be argued that there can be no element of control over a fund, irrespective of who the contributor is?

In SREI Infrastructure Finance Limited vs Shri Ashish Chhawchharia, the NCLAT, in view of the specific facts and circumstances of the case, held the existence of control of the contributor of the AIF over the investee company of the AIF through the AIF. The matter pertained to identification of the appellant as a related party of the corporate debtor in the context of IBC. The surrounding facts and circumstances are briefly put forth as under:

Therefore, in a given set of facts and circumstances, it might be possible to contend that the fund is being controlled by an investor/group of investors.

Conclusion

In questions involving conflict of interest, control, and relationships, Courts have often adopted purposive interpretation in such cases rather than literal interpretation. As held in Phoenix Arc Private Limited v. Spade Financial Services Limited, AIRONLINE 2021 SC 36, albeit in the context of section 21(2) of IBC would still be relevant. Referring to an authoritative commentary by Justice G.P. Singh which states that the terms may not be interpreted in their literal context, if the same leads to absurdity of law, the Supreme Court held: “The true test for determining whether the exclusion in the first proviso to Section 21(2) applies must be formulated in a manner which would advance the object and purpose of the statute and not lead to its provisions being defeated by disingenuous strategies.” Therefore, whether the fund is being controlled by any person/entity is to be seen in the light of all facts and circumstances, and there can be no straight-jacket formula to arrive at a conclusion.

Other resources on AIFs: 

[1] For example, it may be a trust. However, it is possible to envisage funds held in LLP or company format, in which case the fund becomes a separate entity. This article does not envisage a fund formed as a body corporate.

Rights for wrongs: Potential deprivation of shareholders property rights using mandatory demat rule

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

The mandatory dematerialisation provisions under the Companies Act, 2013 requires companies to issue their securities and facilitate transfer requests in dematerialised form only. For private companies, the mandate has become effective since 30th June 2025, hence, every private company (barring a small company) is now required to issue securities in dematerialised form only. Not only do new securities need to be in demat format, the shareholders having existing shareholding in physical form are deprived of their shareholding rights in the form of participation in further rights issue, bonus issue etc. The purpose of mandatory demat rule is to bring shareholders and shareholding in companies in a transparent, tractable domain. However, can it be contended that every person who has not dematerialised his holdings is a non existing persona, or deserves to have his property rights defeated and redistributed to other shareholders? Can such a person be compelled to lose his rights entitlement in further issuance brought by the private company? Even more stark, can such a shareholder lose his rights to the accumulated surplus piled up in the company if the board of directors of the company suddenly decides to issue bonus shares? In simple words, can the mandate of dematerialisation, that is applicable on a company, be interpreted for deprivation of shareholders’ property rights? 

It is not that Rule 9B is new – since its original notification in October 2023, the applicability of the provisions was deferred from the original applicability date of 30th September, 2024 to 30th June, 2025. However, we need to understand that when it comes to private companies, there are lots of minority shareholders who have not converted their shareholdings into demat form. Reasons could be internal family issues, some issues with respect to holdings, or pure lethargy. Let no one make the mistake of assuming that private companies are small companies – private companies may be sitting with hundreds of crores of wealth – these may be family holding companies, JV companies, or even large companies with a restricted shareholding base. If the company is an old legacy company, for sure, the shares would have been in physical form, and may not have been demated. Now, suddenly, finding the law that has come into force, if the board of directors decides to come out with a bonus, the minority holding shares in physical form will be deprived of their right – which would mean, their share of wealth piled up over the years goes to the other shareholders. 

Mandatory dematerialisation prior to subscription to securities 

Sub-rule (4) of Rule 9B puts a condition on the securities holders to have the entire holding in demat form prior to subscription to the securities. The relevant extracts are as below: 

(4) Every holder of securities of the private company referred to in sub-rule (2),- 

XXX

(b) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription

The provision thus explicitly forbids a shareholder from participation in a rights issue or bonus issue – corporate actions that are very much a part of the pre-emptive rights of a person as an existing shareholder. 

Seeking mandatory dematerialisation: powers under section 29 of the Act

Note that Rule 9B has been issued in accordance with the powers contained in Section 29 of CA, 2013. The title of section 29 reads as “Public Offer of Securities to be in Dematerialised Form”, indicating the regulator’s intent of requiring mandatory dematerialisation of ‘public offers’. Sub-section (1)(b) of the said section originally referred to ‘public’ companies, however, the term ‘public’ was subsequently omitted, and sub-section (1A) introduced, so as to require the notified classes of unlisted companies to ‘hold’ and ‘transfer’ securities in dematerialised form only. The amendment was brought in 2019, thus, enabling the Government to bring private companies too within the ambit of mandatory dematerialisation. 

Bonus issue and the unfair treatment to physical shareholders

Rule 9B(4) explicitly refers to ‘bonus issue’, and states that physical shareholders are ineligible to ‘subscribe to the bonus issue’. First of all, the language of the provision is flawed in the sense that bonus issue is mere capitalisation of profits of the company – there is no ‘offer’ on the part of the issuer, and no ‘subscription’ on the part of the shareholder. The same is proportionally available to all shareholders in the ratio of their existing shareholding. 

Since bonus issue leads to capitalisation of profits, there is an effective distribution of profits to the shareholders, though the company does not incur any cash outflow. Depriving a shareholder of his right to bonus issue does not only result in non-distribution of the profits to such shareholder, but also, redistribution of his share of profits to other shareholders. There is a disproportionate distribution of profits, and the physical shareholders stand at a loss. 

Unclaimed dividend: why should the treatment not be the same?

A parallel reference may be drawn from the provisions applicable to payment of dividend, through which distribution of profit occurs, with an immediate cash outflow. Section 124 of CA, 2013 requires that any unclaimed/ unpaid dividend be transferred to a separate escrow account, and the details of the shareholders be placed on the website to provide notice to the shareholders for claiming the same. Even if the same is not claimed by the shareholders during the specified period, the same can still not be re-distributed amongst the other shareholders, rather, gets transferred to the Investor Education and Protection Fund, and may still be claimed by the shareholders. 

The concept of bonus issue, being much similar to that of dividend, the rights of the physical shareholders should not be compromised and the bonus shares should ideally be set aside in a separate suspense account with any DP. Before keeping such shares in the suspense account the issuer company should send intimation letters to such shareholders at their latest known address.

Listed shares and Suspense Escrow Demat Account

Pending dematerialisation of holdings of a shareholder, any corporate benefits accruing on such securities are credited to the Suspense Escrow Demat Account, and may be claimed by the shareholder. Reg 39 read with Schedule VI of LODR Regulations require all such corporate benefits to be credited to such demat suspense account or unclaimed suspense account, as applicable for a period of seven years and thereafter transferred to the IEPF in accordance with the provisions of section 124 of CA, 2013 read with the rules made thereunder. 

How physical shareholders are deprived of their rights to proportionate holding?

Under rights issue, an opportunity is given to the existing shareholders, in proportion to their existing shareholding, to subscribe to the further issue of shares by the company. Thus, any dilution in the voting rights and towards the value of the company is avoided. The alternative to rights issue is through preferential allotment, where the securities may be offered to any person – whether an existing shareholder or otherwise, in any proportion. Since this may lead to a dilution in the rights of the existing shareholders – the same requires: (a) approval of the shareholders through a special resolution and (b) a valuation report from the registered valuer. 

Both of the aforesaid are meant to protect the interests of the existing shareholders. On the other hand, in case of rights issue – neither shareholders’ approval nor a fair valuation requirement applies – on the premise that there is no dilution of rights of the existing shareholders. 

In fact, rights issue of shares can be, and in practice, are fairly underpriced, since there is no mandatory valuation requirement under the Companies Act, and while there are contradicting judgments on whether or not section 56(2)(x) of the Income Tax Act applies on dis-proportionate allotment under rights issue, the valuation under Rule 11UA may be based on historical values – and hence, may not reflect the fair value of the shares. 

Not being entitled to rights is like losing the proportional wealth in a company, resulting in re-distributing the property of the physical shareholders to the demat shareholders. This effectively steals a physical shareholder of his existing holding in the company, that gets diluted to the extent of the disproportionate allotment, and a loss in value on account of the underpriced share issuance.

Listed companies and the approach followed for rights issue 

For listed entities, there is no blanket prohibition on subscription of shares by physical shareholders, rather, necessary provisions are created to facilitate subscription to the rights issue by such shareholders as well [Chapter II of ICDR Master Circular read with Annexure I]. 

  • Where the demat account details are not available or is frozen, the REs are required to be credited in a suspense escrow demat account of the Company and an intimation to this effect is sent to such shareholder. 
  • Physical shareholders are required to provide their demat account details to the Issuer/ Registrar for credit of Rights Entitlements (REs), at least 2 working days prior to the issue closing date. 
  • The REs lapse in case the demat account related information is not made available within the specified time. 

Thus, there is no automatic deprivation of the rights of the physical shareholders to apply in a rights issue, rather, a systematic process is given to facilitate dematerialisation and subscription of shares. 

The problem is bigger for private companies: necessitating additional measures 

A listed entity has a large number of retail shareholders, however, with very small individual holdings. In contrast is a private company, where the number of shareholders are small and each shareholder would be holding a rather significant share. The larger the share of an individual shareholder, the more he is impacted by the nuisance of depriving participation in a rights issue. 

The technical requirement of securities being dealt with in dematerialised form only, cannot give a private company the right to arbitrarily bring up corporate actions to deprive the existing physical shareholders from their rights over the company. 

An ideal approach towards preventing companies from taking an unfair advantage of the non-dematerialised holdings of some shareholders vis-a-vis dematerialised holdings of other shareholders would be by requiring them to keep the corporate actions attributable to the physical shareholders in abeyance, pending dematerialisation of securities. 

Therefore, for instance, in case of rights issue, along with the circulation of offer letter to the shareholders, a dematerialisation request form may be circulated, requiring the shareholders holding shares physically to apply for such dematerialisation. Pending dematerialisation of the securities, shares may be held in a suspense account or may be reserved for the shareholders in any form, and may be credited to the demat account of such shareholders, once the same is available. 

In the absence of any measures for protection of interest of the physical shareholders, the disproportionate treatment to such shareholders pursuant to a corporate action, may be looked upon as the use of law with a mala fide intent, one done with the intent of differentiating between shareholders of the same class – which could not have been possible otherwise, if the shares were held in demat form. 

Thus, one may contend that the ‘right’ is used for a ‘wrong’, thus challenging the constitutional validity of such law.  

Deprivation of property rights require authority of law

Article 300A of the Constitution of India provides for the right to property, stating that “No person shall be deprived of his property save by authority of law”. The Article has been subject to various judicial precedents, although primarily in the context of land acquisition related matters. The Supreme Court, in the matter of K.T. Plantation Pvt. Ltd. vs State Of Karnataka, AIR 2011 SC 3430, has considered ‘public purpose’ as a condition precedent for invoking Article 300A, in depriving a person of his property. 

117. Deprivation of property within the meaning of Art.300A, generally speaking, must take place for public purpose or public interest. The concept of eminent domain which applies when a person is deprived of his property postulates that the purpose must be primarily public and not primarily of private interest and merely incidentally beneficial to the public. Any law, which deprives a person of his private property for private interest, will be unlawful and unfair and undermines the rule of law and can be subjected to judicial review. But the question as to whether the purpose is primarily public or private, has to be decided by the legislature, which of course should be made known. The concept of public purpose has been  given fairly expansive meaning which has to be justified upon the purpose and object of statute and the policy of the legislation. Public purpose is, therefore, a condition precedent, for invoking Article 300A.

Failure to dematerialise: can there be genuine reasons or mere lethargy? 

One may argue that the shareholders have the responsibility to ensure their holding is dematerialised, and hence, a physical shareholder rightfully suffers the consequences of its own lethargic attitude. However, that should not be considered reason enough to deprive one of its rights to the property legally owned and held by it. 

Practically speaking, there may be various reasons for which a shareholder may not be able to dematerialise its existing shareholding in a company, thus becoming ineligible for participation in rights/ bonus issues. For instance, the title of a shareholder might be in dispute, pending which, dematerialisation would not be possible. Another practical issue might be due to loss of share certificates, and the investee company, pending issuance of duplicate share certificates and dematerialisation thereof, may come up with a bonus issue.  

Concluding Remarks:

The dematerialisation provisions, brought to do away with bogus shareholders, might be used to steal away the rights of validly existing shareholders, on the pretext of non-fulfilment of a technical requirement. In view of the mandatory issuance in demat form, a physical shareholder might not be able to ‘hold’ the shares pending dematerialisation, however, the same does not snatch away the ‘entitlement’ of the shareholder to such rights, and cannot, at all, be re-distributed to other shareholders. This cannot, and does not, seem to have been the intent of law, however, in the absence of clear provisions requiring the company to hold such rights in abeyance for the physical shareholders, may lead to inefficacy.

Read More:

Diktat of demat for private companies 

FAQs on mandatory demat of securities by private companies

RBI rationalises Guarantee regulations

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Introduces principle-based regulatory approach and reporting requirements

– Vinita Nair & Harshita Malik | corplaw@vinodkothari.com

– Updated on January 13, 2026

Effective January 10, 2026, FEMA (Guarantees) Regulations, 2026 (‘Regulations, 2026’) came into force repealing the 26-year-old FEMA (Guarantees) Regulations, 2000 (‘Erstwhile Regulations’), moving to principle based requirements and introducing comprehensive reporting of all requirements for all guarantees .  Regulations, 2026 apply to guarantee arrangements involving a surety (person who gives the guarantee), a principal debtor (a person in respect of whose default the guarantee is given) and a creditor (means a person to whom the guarantee is given) where the Person Resident In India (‘PRII’) provides/ avails guarantee to/ from a Person Resident Outside India (‘PROI’). The meaning of guarantee1  includes counter guarantees and (based on stakeholders feedback) also a guarantee for securing a portfolio of debt, obligations or other liabilities.
Regulations, 2026 comprises of 8 regulations covering the general Prohibition (Reg 3), Exemptions for certain transactions by AD Bank and (based on stakeholders feedback) guarantees extended in terms of overseas investment regulations (Reg 4), Permission to act as a surety or a principal debtor (Reg 5), Permission to obtain a guarantee as a creditor (Reg 6), Reporting Requirements (Reg 7) and Late Submission fee for delayed reporting (Reg.8).  These have been notified based on the feedback received on the Draft FEMA (Guarantees) Regulations, 2025 (‘Draft Regulations’) issued in August 2025.

Onus of compliance [Reg. 3]

The Erstwhile Regulations placed the onus on the PRII giving a guarantee or a surety in relation to a debt, obligation or other liability owed to or undertaken by PROI. Regulations, 2026 additionally extends the onus even to a PRII who is the party to a guarantee (surety or creditor or a principal debtor) where any of the other party is a PROI. 

Exemptions under Regulations, 2026 [ Reg 4]

  1. Guarantees by AD Bank’s branch outside India or in IFSC (based on stakeholders feedback),  unless any of the other parties to guarantee is a PRII;
  2. Guarantees by AD Bank in the nature of Irrevocable Payment Commitment (IPC) issued as a custodian bank for a registered FPI on behalf of an authorised central counterparty in India, considering the same is treated as a financial guarantee in terms of RBI prudential norms for commercial banks.
  3. Guarantees provided in accordance with FEMA (Overseas Investment) Regulations 2022 (based on stakeholders feedback) – considering those are governed and reported under a separate framework altogether. 

Conditions to act as Surety/ Principal Debtor [Reg. 5]

A PRII can give a guarantee or be the principal debtor if the following two conditions are met:

  • Condition 1: The underlying transaction for which the guarantee is being given or arranged is NOT prohibited under FEMA; and
  • Condition 2: Surety and principal debtor must be eligible to lend to and borrow from each other under FEMA (Borrowing & Lending) Regulations, 2018 (clause earlier referred to ‘resultant transaction’ and has been modified based on stakeholders feedback). It is intended that at the time of issuance of guarantee itself, the surety and the principal debtor shall ensure that they are eligible to lend and borrow to each other as per Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Compliance with other attendant conditions, such as cost, maturity, etc. for borrowing and lending is not envisaged.

However, Condition 2 provides for three exceptions (listed below in the table):

Nature of guaranteeGiven byIn favor of Condition for exemption
Guarantees by AD bank backed by counter guarantee or collateral (based on stakeholders feedback) AD BankPROICovered by counter-guarantee OR 100% cash collateral in the form of deposit from PROI
Guarantee by agents of foreign Shipping/Airline companyAgent in IndiaForeign Shipping/Airline Co.In connection with its obligation/ liability owed to statutory/Government authority in India 
Both Indian PartiesPRIIPRIIBoth surety & principal debtor are PRIIs

Further, the prohibition added in the Draft Regulations in line with RBI Circular of March 13, 2018 disallowing AD Bank from giving a Letter of Comfort or a Letter of Undertaking is not expressly covered in Regulations, 2026. However, the circular of March 2018 does not seem to have been repealed by RBI either. Accordingly, the prohibition seems to continue. 

Permission to obtain guarantee as a creditor [Reg. 6]

Explicit permission given to PRII creditors to obtain guarantees in its favor where both principal debtor and surety are PROIs, where the underlying transaction is not prohibited under the FEMA.

Reporting requirements [Reg. 7 and 8]

The Erstwhile Regulations did not provide for any reporting requirements. Guarantees provided as part of ECB or in favor of overseas subsidiaries were covered under the reporting made under respective regulations. Regulations, 2026 provide for detailed reporting requirements, with RBI having the right to put the information in public domain.

Who is to report: Regulations, 2026 mandate reporting of guarantees through the AD Banks. Reporting is required to be made by the 

a) Resident surety; or 

b) Principal debtor who arranged the guarantee, where surety is PROI; or 

c) Creditor – where both surety and principal debtor are PROI or where the creditor has arranged the guarantee. 

In case of more than one surety/ principal debtor/ creditor to the same guarantee, any of them can be designated to report that guarantee (based on stakeholders feedback). 

To whom: To the AD Bank

What is to be reported: Guarantees covered in Regulations, 2026 –  (a) issuance of guarantee, (b) any subsequent change in guarantee terms, namely – guarantee amount, extension of period or pre-closure, and (c) invocation of guarantee, if any, 

Format: Form GRN (format provided at Annex to the Regulations, 2026).

One of the instructions for filing form GRN states that change of guarantees issued prior to coming into effect of these regulations i.e. January 10, 2026 shall be reported as a fresh issuance of guarantee from the date of modification. This seems to indicate that guarantees outstanding as on January 10, 2026 need not be reported unless there is a modification. In that case, an invocation of an existing guarantee may also not be required to be reported unless there is any modification which has been reported to the AD Bank under Regulations, 2026.

Further, quarterly reporting on issuance of guarantee for Trade Credit is being discontinued from quarter ending March 2026.

Periodicity and timeline: On a quarterly basis, within 15 days from the end of the respective quarter (revised to periodic basis from ‘as and when basis’ based on stakeholders feedback). Draft regulations provided for reporting within7 days from the date of issuance/ aforementioned change/ invocation of such guarantee

Further, AD Bank to onward report to RBI within 30 days from end of quarter. 

Late Submission fee:  Rs. 7,500 + (0.025% × A × n) rounded up to nearest hundred, where:

  • A = amount involved in the delayed reporting in INR; and
  • n = years of delay rounded-upwards to the nearest month and expressed up to 2 decimal points.

Amendments to ECB Master Directions

Deletion of Para 17.2 of the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (ECB Master Directions) dealing with the quarterly reporting requirement on data on bank guarantees for trade credits furnished by AD Bank.

Deletion of guarantee related provisions in Part III dealing with Structured Obligations: Para 19 dealing with terms and conditions for Non-resident guarantee for domestic fund based and non-fund based facilities and Para 20 dealing with terms and conditions for Facility of Credit Enhancement by eligible non-resident entities to domestic debt raised through issue of capital market instruments.

Amendments to other Master Directions

Master Directions – Export of Goods and Services, Master Directions – Import of Goods and Services , Master Direction – Other Remittance Facilities – Deletion of provision relating to issue of various guarantee in relation to export, import transactions covered under Erstwhile Regulations as Regulations, 2026 move to a principal based regime.

Master Direction – Reporting under Foreign Exchange Management Act, 1999 inserting Form GRN in relation to reporting of guarantees .

Conclusion

The Regulations, 2026 is certainly a welcome change, introducing principle-driven framework, expanded scope (counter-guarantees, portfolio guarantees), and simplified quarterly reporting. Specific requirements provided under ECB norms, ODI rules, Borrowing and lending regulations etc. shall continue to be complied while undertaking the transaction and the existing arrangements should be reviewed for new quarterly reporting obligations in case of modifications.

You may read more at our Resource centre on FEMA

  1. including a ‘counter guarantee’ means a contract, by whatever name called, to perform the promise, or discharge a debt, obligation or other liability (including a portfolio of debts, obligations or other liabilities), in case of default by the principal debtor ↩︎