Pursuant to the recommendations of the Expert Committee and as discussed in the SEBI Board meeting held on Sep 30, 2024 and outlined in SEBI Circular dated December 31, 2024, stock exchanges (‘SEs) were mandated to specify the process and timelines for system-driven disclosure (‘SDD’) for any new ratings or revision in ratings. Pursuant to this, NSE and BSE issued their respective circulars specifying the procedural requirements with respect to system-driven disclosures for the ratings (‘SDD Circulars’) on August 1, 2025.
The receipt and/ or change in ESG ratings is a disclosable event in terms of Regulation 30 of the Listing Regulations read with clause (3) of Sch. III.A.A thereof. Hence, a question arises on whether or not the same is also covered by the SDD Circulars, or whether a manual disclosure is still required on receipt/ change of ESG ratings.
What is an ESG rating?
ESG rating is defined under Reg 28B(1)(b) of SEBI (Credit Rating Agencies) Regulations, 1999. To put it simply, an ESG rating is essentially an opinion about (a) either an ‘issuer’ or (b) a security. The ESG ratings provide an opinion on the ESG profile or characteristics, and may either refer to the ESG risks faced by the entity or the impact it may have on the environment and the society, or both.
Subscriber-pays model – wherein ratings are solicited by the subscribers that may include banks, insurance companies, pension funds, or the rated entity itself.
Issuer-pays – wherein the ratings are solicited by the rated entity, in terms of a written contractual agreement between such entity and the rating provider.
Disclosure requirement under Reg 30 of Listing Regulations
Any receipt of rating or revision in existing ESG rating is a ‘deemed material event’ and covered under clause (3) of Sch. III.A.A of Listing Regulations. Since the event emanates from outside the listed entity, such event is required to be disclosed to the SEs within 24 hours of such receipt / information.
Here, the following needs to be noted w.r.t. the disclosure requirements under Reg 30:
Ratings received under both subscriber-pays and issuer-pays model (solicited as well as unsolicited) are required to be disclosed.
Both upward and downward revision in ratings is required to be informed.
Withdrawal of an existing rating is required to be disclosed
Re-affirmation of an existing rating is required to be disclosed as well.
Automation of ESG rating disclosure
The SDD Circulars referred above, are applicable to both credit ratings and ESG ratings. Pursuant to the same, the ERPs are required to report the ESG ratings provided by them to the SEs. The manner of reporting by ERPs has also been provided in the SDD Circular itself. Once reported to the SEs, the ESG rating shall be automatically reflected on the website of the BSE and NSE.
Therefore, since SEs will get the ratings from the ERPs itself, both solicited and unsolicited ratings will be disclosed on the SE platform.
When does this SDD come into effect?
In terms of SDD Circulars, the disclosure of credit and ESG rating has become effective from August 2, 2025.
Actionable for the LEs?
Since the ESG rating shall be consumed by the SEs from the ERPs and auto disseminated on the website, there is no actionable for the LEs in relation to the disclosure of ESG rating under reg 30. However, LEs should monitor whether the ratings provided to them are reflected on SEs. In case any rating is not reported by the ERP, the LE may proactively disclose the same at its end.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2025-11-04 15:47:012025-11-07 13:02:33Disclosure of ESG ratings - automated or still needs manual disclosure?
Regulatory reforms to ensure EoDB for Debenture Trustees are being discussed and implemented in phases since January, 2025. SEBI proposed amendments with respect to permissible activities of DTs, the manner of utilisation of Recovery Expense Fund, specified rights of DTs with corresponding obligations on issuers and introduction of a model debenture trust deed through a consultation paper (‘CP’) dated November 04, 2024, which were deliberated in its meeting held on December 18, 2024, and finally approved the revised proposals on June 18, 2025.
In this article, we have discussed threadbare the regulatory changes approved in June 2025 and notified in October, 2025 by SEBI and actionables arising therefrom for issuers & DTs, pursuant to amendments made in SEBI (Debenture Trustee) Regulations, 1993 (‘DT Regulations’), SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) that become effective from October 27, 2025 for DT Regulations and LODR Regulations and October 28, 2025 for NCS Regulations.
Permissible Activities for DTs [newly inserted Reg. 9C in DT Regulations]
Key issue:
SEBI primarily governs DTs through DT Regulations, which presently do not restrict DTs to undertake any activities. However, based on the revenue data of the top 5 DTs, SEBI raised a concern that DTs presently undertake other trusteeship activities, which are either regulated by other Financial Sectors Regulators (FSR) like (Securitisation trustee, security trustee, public deposit trustee) or not expressly regulated by any authority (outside purview of SEBI such as being an escrow agent, facility agent, Monitoring Agent, trustee for unlisted NCDs), thus creating potential regulatory and systemic risks. Another limitation is that SEBI cannot effectively address investor grievances or issues arising from such unregulated activities.
Proposal:
SEBI proposed to allow DTs to undertake such activities (not regulated by SEBI) which are governed by any Financial Sector Regulator (FSR). However, any other unregulated activities are required to be hived off to a separate legal entity within 1 year. However, later on SEBI dropped the proposal of hiving off in its meeting in December 2024.
Present Amendment:
Fig 1: Activities permitted to be carried on by DTs
With respect to the term ‘separate business unit’ though not defined in the amendment, a reference can be drawn from the SEBI Board Agenda (Para 3.7.3.) which states that DTs shall undertake activities not regulated by SEBI through one or more Separate Business Unit of the DT, segregated by a Chinese Wall and ring-fenced from the SEBI regulated activities. This seems like a relaxation for the DTs, where permitted activities can be housed under one entity but only in different segments/ divisions, compared to the initial proposal of hiving off to a separate legal entity.
A timeline of 6 months has been provided to transfer permitted activities to a separate business unit.
Another major restriction which Reg. 9C (1) provides, is a prohibition on RBI-regulated entities to undertake DT activities. DTs which are also RBI-regulated are mandated to carry out activities of DT through a separate business unit only.
Additionally, to maintain transparency, Reg. 9C(2) mandates DTs to ensure the net worth as per DT Regs. (Reg. 7A) is ring-fenced to safeguard it from any adverse impact arising from undertaking other activities by DT.
Standardisation of Debenture Trust Deed (‘DTD’) format
Key issue:
Extant regulatory framework viz. Reg 18 of NCS Regulations and Reg 14 of the DT Regulations do not provide for a standard format of DTD. Instead, the provisions indicate the mandatory contents of DTD as prescribed under section 71 of the CA, 2013 read with rule 8 of Companies (Share Capital and Debenture) Rules, 2014 and form SH-12. Due to this, DTDs were observed to have different contractual terms and their documentation varied from issuance to issuance. Hence, a standardised format was necessary for market optimisation, which is flexible enough to accommodate commercial understanding amongst the parties.
Proposal:
In light of the concerns discussed above, Industry Standards Forum – Debt (ISF Debt), proposed four model DTDs categorised as secured public issue, unsecured public issue, secured privately placed issue and unsecured privately placed issue. Model DTD in case of secured NCDs was provided in the CP (broadly divided into 4 parts- see fig 2 below).
Fig 2. Indicative bifurcation of DTD as proposed in annex- 1 of the CP.
Present Amendment:
While the model DTD is yet to be notified, SEBI has rolled out the enabling amendments in DT Regulations and NCS Regulations. As a result, the erstwhile requirement of having DTD in 2 parts viz.“Part A containing statutory/standard information pertaining to the debt issue; and Part B containing details specific to the particular debt issue” is done away with.
In case the issuer intends to deviate from the to be notified format of DTD, DTs may permit, subject to disclosure of a key summary sheet of deviations along with the rationale in the offer document of NCDs (GID/ KID/ shelf prospectus).
Utilisation of Recovery Expense Fund (‘REF’)
Key issue:
Reg. 11 of NCS Regulations mandates issuers of NCDs to create REF with the stock exchanges to enable the DT to take prompt action for enforcement/legal proceedings in case of ‘default’. The existing framework (Chapter IV of Master circular for Debenture Trustees) only lists out the illustrative expenses (legal expenses, cost for hosting meetings etc) and not the explicit list of eligible expenses. Since, DTs require prior consent of debenture holders to utilise REF funds, the absence of a clear expense list often leads to delays and difficulties in obtaining approvals and reimbursements.
Proposal:
SEBI proposed to provide an indicative list of eligible expenses for utilisation of REF (refer CP). Additionally, for eligible expenses, a mere intimation to the debenture holders would be sufficient to utilise REF. However, for other expenses, prior approval is still required. DTs will also be required to furnish a certificate from the auditor (format is yet to be notified) to the stock exchanges w.r.t eligible expenses to claim from REF.
Present Amendment:
Newly inserted Reg. 15A(3) allows DTs to utilise REF in the manner specified by SEBI. Manner of utilisation and other conditions, as approved by SEBI above, are yet to be notified.
Issuers to furnish information to DTs [Reg. 56 of LODR]
Key issue:
Certain compliance obligations are bestowed upon DTs with express timelines, for which DTs rely on the information provided by the issuers. However, corresponding responsibility, in respect of such compliances, has not been explicitly established for the issuers.
Proposal:
To specify the timeline for issuers to furnish information to the DT as per Reg. 56 of LODR Regulations to enable the DTs to keep a track of the status of compliances by the issuer and make necessary timely compliances as applicable to them.
Present Amendment:
Reg. 56 is amended to provide a timeline of 24 hours from the occurrence of the event or information, within which issuers are required to furnish information to the DTs.
Conclusion
This amendment, though focused on EoDB, has placed an enhanced responsibility on the DTs and issuers to ensure timely compliance. DTs are now required to conduct non-SEBI regulated activities through separate business units while keeping their net worth protected from any adverse impact. Once SEBI notifies the detailed framework for REF, DTs will have ease in utilization of REF. Another highlight of the amendment is the introduction of model DTD, requiring issuers to disclose any deviations with proper justification in the offer document. Issuers are now also obligated to share all relevant information with DTs within fixed timelines of 24 hours, enabling smoother coordination and timely regulatory reporting.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-11-03 11:46:332025-11-03 11:56:59A MIX OF EASE AND BURDEN: SEBI’s latest regulatory push redefines the role of DTs and issuers
Designated persons, being insiders with regular privileged information flow, cannot be doing what other investors can do. Several option trades may be devices to skim short term swings in share prices. can designated insiders do these? This interesting question, mostly ignored in Indian corporate practice, is explored in this article.
Derivatives trading is becoming increasingly popular in India, including amongst the retail investors. A recent address by SEBI’s Chairman urges the retail investors to assess their risk capacity while dealing in derivatives and avoid speculative trades. A July 2025 study by SEBI on trading activity of investors in Equity Derivatives Segment (EDS) indicates a relatively very high level of trading in EDS, as compared to other markets, particularly in index options. Further, within EDS, options segment (in premium terms) has shown growth at the fastest rate with average daily premium traded growing at the CAGR of 72% for index options and 54% for single stock options.
Given the large volumes of derivatives trading, in addition to the concerns on loss of investor’s money (nearly 91% of individual traders incurred net loss in EDS in FY 2025), it is also important to examine the concerns which would arise from an insider trading perspective. Pertinent questions would be whether derivatives trading also comes within the purview of insider trading, and if the answer to this is yes, whether it will also attract the prohibition around contra-trade, where the market participants bet on the short-term future value of the underlying assets to make a profit.
This article examines the aforesaid questions in the light of extant laws, and global position.
Prohibition on insider trading
The prohibition on insider trading comes from Section 12A of SEBI Act –
“No person shall directly or indirectly—
(d) engage in insider trading;”
Reg. 4(1) of PIT Regulations applicable universally to all insiders, also puts a blanket prohibition on trading when in possession of UPSI:
“No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
Para 4 of Schedule B (model CoC for listed entities) specifically pertains to trading by Designated Persons (DPs). They can trade subject to compliance with the Regulations – which provide for monitoring through the concept of “trading window” that is, during which a DP can be reasonably expected to have access to UPSI. Therefore, at such times, the trading window is closed, and the DP cannot trade in securities of that company. When the trading window is open, trading can take place after getting pre-clearance from the Compliance Officer.
In case of a fiduciary, the monitoring happens through a grey list. The concerned persons have to take preclearance from the Compliance Officer. Here, trading restrictions are applicable for securities of such listed companies, for which the person/s is/are acting as fiduciary.
Derivative trading vis-a-vis insider trading norms in India
Prohibition on derivative transactions under 1992 Regulations
“4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.”
Thus, under the 1992 Regulations, there was a complete and explicit prohibition on derivative transactions for designated employees. Note that the ban was for “any time” and not restricted to only while in possession of UPSI.
Position under the 2015 Regulations
While the contra-trade restrictions have been retained in the existing (2015) Regulations, the provision explicitly calling for blanket prohibition on derivative transactions was omitted. The Sodhi Committee Report does not contain any specific discussions in this regard.
Nonetheless, derivatives, qualifying the definition of “securities”, continue to be covered by the insider trading regulations. Reg 6(3) of the 2015 Regulations specifically refers to trading in derivatives, for the purpose of disclosure of trading in securities.
The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this Chapter.
As regards the value of derivatives for such disclosures, the same refers to the “traded value” of the derivatives. The format for such disclosures, as specified in the SEBI Master Circular on Surveillance of Securities Market (Annexure – I), also refers to disclosure of trading in derivatives on the securities of the company, and requires calculation of notional value of options based on premium plus strike price of the options.
Further, trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular].
Whether the immediate relative of the designated person can trade in the derivatives of the company?
Answer
Yes. Designated person and its immediate relative can trade in derivatives when not in possession of UPSI and such trades are accordingly governed by the code of conduct.
Thus, the following points may be noted –
A person cannot undertake insider trading in securities – directly or “indirectly”. Derivatives are defined under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956.
“Derivative”—includes
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central Government to be derivatives;
Therefore, trading in derivatives may technically tantamount to trading in underlying securities – indirectly. This is irrespective whether the transaction results in actual delivery or is only net-settled in cash.
The definition of “securities” includes derivatives – hence, there should not be any confusion as to why trading in derivatives of the underlying securities should be excluded from the scope of “trading”
Chapter III of PIT Regs. which is applicable to all insiders (note, that DPs are closest insiders), explicitly says that trading in securities includes trading in derivatives.
SEBI FAQ (Q. 52 above) makes it clear that trading in derivatives is only possible when the DP/ immediate relative is not in possession of UPSI[1]. Of course, whether or not the DP/immediate relative is having possession of UPSI or not, is to be seen at the time the trading is proposed to be done.
Therefore, what is clear is that unlike the 1992 Regulations, there is no explicit provision calling for blanket prohibition on the derivative transactions by DPs and their immediate relatives. However, restrictions as are applicable otherwise in relation to securities of a listed company, would also apply to derivatives having such securities as underlying. Of course, the restriction is not a blanket prohibition as was in 1992.
In simple terms, a derivative should be treated no differently than the underlying security itself. Consequently, in view of the author:
When the trading window is closed, a DP should not be allowed to enter into a derivative in securities as well.
When the trading window is open, trading in derivatives should be subjected to preclearance.
The above position is also apparent in other jurisdictions, where, in the context of insider trading norms, dealing in derivatives is equivalent to dealing in underlying securities.
Once it is clear that trading in derivatives is equivalent to trading in underlying security, then it is obvious to conclude that trading in derivatives will also be governed by contra-trade prohibition in the same manner as trading in the underlying itself. See detailed discussion below.
Issues concerning contra-trade
Rationale for prohibiting contra-trade
The insider trading norms around the world prohibit contra trade or short swing trades by the persons privy to or likely to be privy to unpublished price sensitive information (UPSI) about the listed securities. The SEBI (Prohibition of Insider Trading) Regulations, 2015 restricts the Designated Persons (DPs) and their immediate relatives from undertaking reversal trades, within six months from undertaking the previous trade transaction. The intent is to prevent the abuse of UPSI by making short-term profits through unfair means.
The 2008 Consultation Paper states, “It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions, which are assumedly based on at least some level of superior access to information, whether material or not.”
Hence, whenever there is a contra-trade within a short span of time (6 months), there is a presumption that the said trade is based on some “superior” access to information – as such, contra-trades are simply prohibited. The DP cannot undertake a contra-trade even if it is contended that he does not have UPSI.
Contra-trade in case of derivatives
Naturally, a question arises on whether DPs can trade in derivatives, and if so, when does the same qualify as contra-trade or otherwise, and the consequences that follow. Let’s take a simple illustration – Mr. A, a DP of X Ltd. purchases 100 shares of X Ltd. on 1.11.2024. Then purchases a put option on 15.11.2024, for all 100 shares. On 01.02.2025, on maturity of the put option, A exercised the put option and sold all the 100 shares. All these transactions, as one would note, are happening within a period of 6 months. The question is – whether A was allowed to undertake the 2nd transaction of purchasing a put option within 6 months of the 1st transaction.
There is a question appearing in SEBI FAQ, as follows:
37.Question
In case an employee or a director enters into Future & Option contract of Near/Mid/Far month contract, on expiry will it tantamount to contra trade? If the scrip of the company is part of any Index, does the exposure to that index of the employee or director also needs to be reported?
Answer
Any derivative contract that is physically settled on expiry shall not be considered to be a contra trade. However, closing the contract before expiry (i.e. cash settled contract) would mean taking contra position. Trading in index futures or such other derivatives where the scrip is part of such derivatives, need not be reported.
This question above clearly deals with treatment of expiry of a derivative contract or settlement of a derivative contract as to whether those events would be treated as contra-trade. That is, a culmination of a derivative contract, resulting in the delivery of the underlying will, of course, not amount to a separate “trade” – therefore, there is no question of a contra-trade. On the other hand, where no physical delivery is taken, rather, settled in cash (payment of the difference between the contract’s entry price and market price at expiry), the same amounts to a “sell” trade, thereby, a reversal of the position of the DP. Thus, where the contract is proposed to be settled prior to expiry, it would result in a different transaction/trade – thus, it should be treated as a contra-trade.
Now, if seen in a practical context, in India, the validity of derivatives contract would usually be less than 6 months (typically 1-3 months[2]). And, typically, these derivative transactions in such cases are net-settled before expiry, rather than culminating in actual delivery of securities[3]. Options enable the investors to speculate in shares of higher values and volumes as compared to the cash segment since the only amount payable would be the premium and the net difference in the strike price and spot price later on. Further, cash settlement in derivatives provides a higher leverage to the trader.
In the above scenario, there will always be a higher possibility of a contra-trade. The illustrations below explain the same:
S. No
Transaction
Remarks (assuming T1 and T2 happen within a period of 6 months)
1
T1 – Buy call option T2 – Cash settlement
Contra trade. Buying call option is equivalent to a “buy” transaction. Subsequent cash settlement indicates a “sale” transaction.
2
T1 – Buy call option T2 – Physical settlement
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, subsequent physical settlement only results in delivery of such shares.
3
T1 – Buy call option T2 – Expiry of option on account of out-of-the money
Not a Contra trade. Buying call option is equivalent to a “buy” transaction, however, did not result in delivery on account of the strike price > market price at the time of expiry.
2
T1 – Sell call option T2 – Cash settlement
Contra trade. Selling call option is a “sale” transaction. Cash settlement indicates a “buy” transaction.
3
T1 – Buy put option T2 – Cash settlement
Contra trade. Buying put option is a “sale” transaction. Not taking physical delivery of the shares and carrying out cash settlement indicates a “buy” transaction.
4
T1 – Sell put option T2 – Cash settlement
Contra trade. Selling put option is a “buy” transaction. Cash settlement is deemed to be a “sale” transaction.
As such, trading in derivatives would be much more vulnerable to chances of insider trading, than actual trading in securities. Hence, it becomes extremely important to put mechanisms in place to ensure that derivatives trading be subjected to enhanced restrictions and controls, as suggested below.
Enhanced safeguards in respect of derivative transactions by DPs
It is quite clear that a derivative transaction that results in cash settlement construes a contra-trade. On the other hand, where physical delivery is taken (although it is not very common to close a derivative contract in physical settlement), the derivative transaction is not considered as a contra-trade (although the same is also to be matched against the previous trade in cash segment). Therefore, in order to ensure that the trade does not result in contra-trade, it is essential that the derivative is either settled by delivery or simply expires on the maturity date, and that there is no cash settlement.
In order to ensure this, in case of purchase of options (put/ call) by the DP, pre-clearance may be provided by the Compliance Officer subject to receipt of a declaration that the DP shall necessarily undertake physical settlement of such trades at the maturity date. Of course, there would be no concerns in case of an out-of-the money option, that is, where prior to the expiry of the contract, the market price remains below the strike price. An out-of-the money option does not result in any profits in the hands of the option holder, however, prevents additional loss in the face of exercising an option where the strike price at which the option is exercised and shares are acquired is higher than the current market price at the time of such exercise of option (upon maturity of the contract).
On the other hand, in case of sale of options (put/ call) by the DP (that is, where the DP is the writer of the option), the physical settlement cannot be guaranteed by the DPs, and chances of contra-trade are higher, as the counterparty (that is, buyer of the option) may choose to have cash settlement before the expiry of the derivative contract. Therefore, in order to obviate the possibility of a contra-trade happening, it might be necessary to completely prohibit sale/writing of options by DPs. This prohibition may be enabled through the code of conduct. . In fact, it is seen that several large listed companies have put a blanket prohibition on derivative transactions by DPs and their immediate relatives.
Contra-trade where there is a preceding/succeeding trade in securities
Besides, this FAQ does not deal with a scenario where a DP who has traded in securities already, now proposes to enter into a derivative contract within a span of 6 months from the date of original contract.
However, one thing is clear from this FAQ – the very entering into the derivative contract (and not expiry/maturity thereof) has been considered to be a trade by SEBI. Also, as discussed in the first part of this article, trading in derivatives should be considered as trading in securities itself. As such, if there has been a trade in securities, and there is a subsequent trade, although in derivatives of those very securities, it would result in contra-trade. That is, if in the above example, A enters into a “put option” – then he will have the right but not the obligation to “sell” the underlying shares, within 6 months of buying the shares. Whether to actually “sell” or have a concrete “right to sell” at a future date at or above a given price – it is nothing but a clear case of “contra-trade”.
For instance, assume a DP purchases shares of the listed company on 1.1.2025. Subsequently, on 1.3.2025, the DP purchased a put option. The put options, akin to a sale transaction, results in contra-trade when matched against the previous “buy” transaction in the cash segment, within a gap of less than 6 months between the two transactions. Similarly, where a call option is bought within 6 months of a previous sale transaction, the same results in contra trade.
Compliances in relation to trading in derivatives by DPs
(1) Appropriate mechanisms in the Code of Conduct
Prior to making trades in the derivatives, it is important for the DP to ensure that the Code of Conduct does not prohibit such trades. Unless expressly prohibited, the Code of Conduct may contain necessary clauses as discussed above, in order to enable derivative trading by DPs, subject to enhanced controls on the same.
(2) Manner of identification of derivative trades
The trading in equity derivative instruments i.e. Futures and Options of the listed company are covered by the system driven disclosures [Para 3.3.3. of the SEBI Master Circular]. Hence, an instance of contra trade through derivative instruments is easily identifiable by the Compliance Officer.
(3) Pre-clearance for the purpose of trading
Not all trades of DPs are pre-cleared by the Compliance Officer. The pre-clearance is required only for such trades that exceed the thresholds provided in the CoC of the respective listed entity, generally Rs. 10 lacs or more. Here, the value of trade becomes important, and cannot be just limited to the premium payable/ receivable at the time of purchase/sale of such contract. The price of the securities is also relevant. Pre-clearance may be granted by the Compliance Officer, subject to such conditions and undertaking as suggested above.
(4) Trading during closure of trading window
The DPs cannot trade in the derivatives of a company’s securities during the trading window closure period. In order to ensure the trades are not done during the trading window closure period, the concept of freezing of PAN has been introduced – both at the level of the DP as well as their immediate relatives (see an article here). However, the freezing of PAN is applicable only to the quarterly TW closure pending announcement of financial results.
The DP to ensure that neither him, nor his DPs trade in the derivatives of the company during the closure of trading window period.
(5) Reporting of trades in derivatives
As regards the reporting of trade in derivatives, the SEBI Master Circular provides guidance on calculation of notional value of trades, to be calculated based on premium plus strike price of the options. The disclosure of trades are primarily system-driven, based on the PAN details of the DPs updated with the designated depository. Having said that, in case of trades of the immediate relatives of the DPs, or where the PAN details are not updated with the depository, manual disclosures are required for such trades.
(6) Consequences of violation – disgorgement of profits and penal actions
A breach of contra trade restriction leads to disgorgement of profits made and its remittance to SEBI for credit to IPEF. Here, the question arises on what is considered the value of profits for disgorgement to IPEF, in the context of derivatives.
Where the transaction pertains to ‘sale’ of options, the profits would usually be the premium earned by the seller of options. On the other hand, in case of ‘purchase’ of options, the profits should be the difference between the buy and sale value, net of other expenses in connection with such option contracts.
Guidance may also be taken from 17 CFR § 240.16b-6(d) of the SEC Act, which states that the amount of profit shall be calculated as the profits that would have been realized had the subject transactions involved purchases and sales solely of the derivative security valued as of the time of the matching purchase or sale, and calculated for the lesser of the number of underlying securities actually purchased or sold. The amount of such profit shall not exceed the premium received for writing the option.
In addition to disgorgement of profits, penalty may also be levied. For instance, in an adjudication order dated 29th April 2022, the purchase and sale of options on consecutive days resulted in contra trade violation attracting a penalty of Rs. 2 lacs.
Global view on contra-trade in derivatives
Section 16(b) of the Securities and Exchange Commission Act, 1934 of the USA, restricts contra trade in equity securities, for a beneficial owner holding more than 10% of any class of any equity security, director and officer, including a security-based swap agreement involving any such equity securities. Exemptions have been prescribed for derivative transactions in certain cases in CFR § 240.16b-3 of the General Rules and Regulations.
The General Rules and Regulations of the SEC provides detailed guidance on when a derivative trade qualifies as a short swing trade and vice versa. The same has been summarised here:
Transactions that qualify as “purchase” of underlying securities:
establishment/ increase of a call equivalent position
liquidation/ decrease of a put equivalent position
Transactions that qualify as “sale” of underlying securities:
establishment/ increase of a put equivalent position
liquidation/ decrease of a call equivalent position
Transactions that are exempt from short swing restrictions:
increase/ decrease pursuant to fixing of the exercise price of a right initially issued without a fixed price, where the date the price is fixed is not known in advance and is outside the control of the recipient
Closing as a result of exercise or conversion of the option, that is,
Acquisition of underlying securities at a fixed exercise price due to the exercise or conversion of a call equivalent position
Except in case of out-of-the money option, warrant or right
Disposition of underlying securities at a fixed exercise price due to the exercise of a put equivalent position.
Where the person trading is not a major beneficial holder, and thus, an insider, at the time of both the transactions which are being termed as contra trade [Section 16-b of SEC Act].
Other exemptions apply w.r.t. transactions with the issuer, subject to certain conditions and transactions pursuant to tax conditioned plans [CFR § 240.16b-6]
Article 164 of the Financial Instruments and Exchange Act, 1948 of Japan also restricts reverse trades in specified securities, by major shareholders and officers etc, who may have obtained secret information in the course of their duty or by virtue of their position. Specified securities, for the purpose of the said provision, include Derivatives [Article 163 r/w Article 2(xix)].
Judicial precedents on contra trade transactions
In Allaire Corporation v. Ahmet H. Okumus, the Circuit Court held that when the option is written by the insider, he has no control over whether the options buyer will exercise the option or square it off. Thus, trade carried out pursuant to selling an option shall not be considered a transaction for the purpose of determining whether a set of transactions is a contra trade or not. The facts of the case involved writing another option within six months of expiry of the first option remaining un-exercised. Note that the expiration of the first set of options does not constitute a purchase matchable to the later sale of a different set of call options.
However, as clarified in Roth v. The Goldman Sachs Group, Inc., et al., No. 12-2509 (2d Cir. 2014), when matched against its own writing, the expiration of an option within six months is a “purchase transaction” for the purpose of section 16-b.
The danger of misuse of non-public information exists at the time the option is written, and the expiration of that option is the moment of profit. Matching writings with expirations of different options does not clearly advance the purposes of the statute. Options written at different times are less likely to give rise to speculative abuse, and matching the expiration of an option only to its own writing recognizes the more evident danger.
In Chechele v. Sperling,the Circuit Court held that where pursuant to the settlement of the futures contract, the pledge on shares is revoked, the revocation is not considered to be a ‘purchase’ transaction to be combined with the open market sale of such shares to identify these trades as contra trades.
The exercise of a traditional derivative security is a “non-event” for section 16(b) purposes.
In the case of Macauley Whiting v. Dow Chemical Company, the Court held that where the insider has exercised an option to purchase shares and his spouse has sold shares within a period of 6 months, these transactions shall be considered to be short swing trades (contra trades).
In the context of § 16(a), the Commission has evolved a dual test of an insider’s beneficial ownership of his or her spouse’s shares. Such beneficial ownership may derive from the insider’s “power to revest” in himself title to those shares.[6] Or it may result from his enjoyment of ‘benefits substantially equivalent to those of ownership.’
In the case of Kern County Land Co. v. Occidental Petr. Corp., a person fails in his attempt of a takeover due to a defensive merger carried out by the target company. During the period when the merger was being finalised, the acquirer entered into an option agreement with the transferee company. The option agreement stipulated that if and when the merger succeeds, the transferee company would buy the shares held by the acquirer pursuant to the takeover attempt. The US Supreme Court held that such a set of trades would not result in contra trade because the actions of the acquirer were involuntary.
The option was grounded on the mutual advantages to respondent as a minority stockholder that wanted to terminate an investment it had not chosen to make and Tenneco, whose management did not want a potentially troublesome minority stockholder; and the option was not a source of potential speculative abuse, since respondent had no inside information about Tenneco or its new stock.
Concluding Remarks
In practice, several large listed companies continue to prohibit trading in derivatives by the Designated Persons and their immediate relatives through their Code of Conduct. The regulations do not enforce such blanket prohibition, although no trading can be done that falls foul of other requirements of the Regulations – viz., trading while in possession of UPSI, contra trades, trading during closure of trading window, trading without pre-clearance etc.
Having said that, derivatives, by nature, are short term trades based on the expectations of the movement in price of the securities in a certain direction within a short period of time. Therefore, in case of trades by DPs, the chance of such trades being motivated by an information asymmetry is comparatively higher, thereby potentially resulting in an insider trading allegation on such DP.
[1] Annexure VII of ICSI Guidance Note on Prevention of Insider Trading states “The designated persons and their immediate relatives shall not take any positions in derivative transactions in the Securities of the company at any time.” However, the source of such stipulation is not clear, as currently there is no corresponding provision in PIT Regulations.
Since the introduction of High Value Debt Listed Entities (HVDLEs) as a category of debt-listed entities placed on a similar pedestal to equity-listed entities in terms of corporate governance norms, the regime has undergone several rounds of extensions and regulatory changes. After several extensions towards a mandatory applicability of corporate governance norms, a new Chapter V-A was introduced in LODR, vide amendments notified on 27th March 2025 (see a presentation here), amending, amongst others, the thresholds towards classification of an entity as HVDLE (increased from Rs. 500 crores to Rs. 1000 crores). The new chapter, however, was not updated for the changes brought for equity-listed entities vide the LODR 3rd Amendment Regulations, 2024 and required some refinement, particularly, in respect of provisions pertaining to related party transactions (see an article – Misplaced exemptions in the RPT framework for HVDLEs and the representation made to SEBI).
In order to address the gaps as well as providing some relaxations to HVDLEs, a Consultation Paper has been released on 27th October, 2025 proposing primarily, an increase in the threshold for identification as HVDLEs and alignment with the LODR 3rd Amendment Regs. We discuss the proposals briefly with our comments on the same.
Threshold for identification of HVDLEs
Increase from existing Rs. 1000 crores to Rs. 5000 crores
Expected to reduce approximately 64% entities (from existing 137 to 48 entities)
VKCO Comments: While the proposal intends to bring down the number of HVDLEs, on account of the huge compliance burden placed on HVDLEs coupled with the fact that such threshold is disproportionately low for NBFCs engaged in substantial fundraising through debt issuances, a clarification may be required that the entities that cease to be HVDLEs on account of the increase in thresholds, shall not be required to ensure continued compliances on account of the sunset clause for the next three years [Reg 62C(2)]. Such clarification is particularly important in view of the current stand taken by stock exchanges, where, the entities that ceased to be HVDLEs on account of increase in threshold from earlier Rs. 500 crores to Rs. 1000 crores, continued receiving notices from SEs with respect to non-filing of quarterly report on compliance with corporate governance norms and other similar requirements.
Proposals in line with amendments made for equity-listed entities vide LODR 3rd Amendment Regs (see presentation on the changes here)
Clarification that prior approval is required for directorship as NED beyond the age of 75 years [Reg 62D(2)/ Reg 17(1A)]
Time taken to receive approval of regulatory, government or statutory authorities, if applicable, to be excluded from the 3 months’ timeline for shareholders’ approval to board appointment [Reg 62D(3)/ Reg 17(1C)]
Exemption from obtaining shareholders’ approval for nominee directors of financial sector regulators or those appointed by Court or Tribunal [Reg 62D(3)/ Reg 17(1C)]
Any vacancy in board committees to be filled within 3 months [Reg 62D(5)/ Reg 17(1E)]
Recommendations of board to be included in the explanatory statement to shareholders’ notice [Reg 62D(7)/ Reg 17(11)]
Minor terminology changes from year to financial year, income to turnover etc.
Exemption from shareholders’ approval requirements for sale, disposal or lease of assets between two WoS of the HVDLE [Reg 62L/ Reg 24]
Additional timeline of 3 months for filling vacancy in the office of KMP in case of entities having resolution plan approved, subject to having at least 1 full-time KMP [Reg 62P/ Reg 26A]
Omission of disclosure of material RPTs in quarterly corporate governance report [Reg 62Q(2)/ Reg 27(2)]
Eligibility criteria and other provisions relating to appointment of Secretarial Auditors [Reg 62M/ Reg 24A]
Alignment of RPT related provisions by giving reference to Reg 23 as applicable to equity-listed entities in omission of the existing provisions under Reg 62K, except for retention of requirements in relation to NOC of debenture-holders through DT (see our FAQs here) [Reg 62K/ Reg 23]
Turnover scale based materiality thresholds for RPTs and other amendments as approved in Sep 12 SEBI meeting for equity-listed entities (see an article on the approved amendments here)
VKCO Comments: The proposals aim to fill in the gaps that were created on account of the insertion of new chapter V-A for HVDLEs, without considering the amendments made under LODR pursuant to LODR 3rd Amendment Regulations, 2024. However, gaps may continue to exist in relation to the operability of the exemptions from approval requirements for significant RPTs of the subsidiaries, since, the proposed change continues to exclude significant RPTs of such subsidiaries that are covered by the provisions of Reg 62K and does not refer to subsidiaries covered by the provisions of Reg 15 and 23, as is the case for equity-listed entities. While the proposed Reg 62K(1) refers to compliance with Reg 23 in its entirety, by reading the expression “listed entity” as HVDLE, an explicit clarification may be incorporated in this regard.
Flexibility to SEBI for prescribing timelines for filings
Power to SEBI to prescribe timeline for filing of compliance with corporate governance norms, instead of existing timeline for 21 days
VKCO Comments: Currently, for equity-listed entities, reporting on compliance with corporate governance norms are a part of Integrated Filing – Governance, required to be filed within 30 days from end of each quarter. The move to provide flexibility to SEBI in prescribing timelines for corporate governance filings may be in order to extend the applicability of Integrated Filing requirements to HVDLEs as well.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Payal Agarwalhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngPayal Agarwal2025-10-27 23:33:452025-10-27 23:33:46HVDLEs proposed to be moved from High Value to Higher Value
The position of a compliance officer is a reflection of challenges. As much as the individual holding this position enjoys reputation and superintendence, there is a constant expectation from regulatory authorities of ensuring compliance and active enforcement of the law. In the context of PIT regulations, SEBI does not expressly specify the extent of a Compliance Officer’s role(hereinafter referred to as CO) in supervising a particular compliance; however, various adjudication orders throw light on the expectations from CO. In recent cases, the regulatory watchdog has held the CO, amongst others, liable for lapses in complying with the PIT regulations, whereas in some cases, it has exonerated the CO from any liability imposed by default, owing to its superlative position in the company. The article delves into the nuances of the role of a CO, aiming to propose a clear, definitive line of duty to be observed and appreciated by the SEBI during instances of violation of this law.
2. Identifying a CO- SEBI (PIT) Regulations 2015
Reg 2(1)(c) of the SEBI (PIT) Regulations defines a Compliance Officer as: 1. Any senior officer, designated so and reporting to the board of directors 2. A financially literate person capable of deciding compliance needs. 3. A person responsible for compliance with policies, procedures, maintenance of records, and monitoring adherence to the rules for the preservation of:
Unpublished price-sensitive information (hereinafter referred to as UPSI)
Monitoring of trades, and
The implementation of the codes specified in these regulations is under the supervision of the board of directors of the listed company.
It is to be noted that the definition gives way for any senior officer to be a compliance officer to perform obligations[1] stated in the following segment. The SEBI had also noted in a matter that the interim company secretary of a company who has not been appointed as the compliance officer under PIT during the UPSI period cannot be forthwith held liable.[2] The above duties (monitoring, implementation, maintenance, etc) are, though explanatory of the role of a compliance officer, not definitive or fenced in form and substance. The SAT held in a case that a CO cannot be blamed for disclosures under the above regulation, of board-approved misstatements.[3] Relevant extracts are given below:
“The Compliance Officer works under the direction of the Board of Directors of the Company. It was not open to the Compliance Officer to comply with Clause 36 of the Listing Agreement. At the end of the day, the Compliance Officer is only an employee of the Company and works on the dictates and directions of the management of the Company. Thus, when the entire management is being penalised, it was not open to the AO to also book the Compliance Officer for the said fault.”
Now this brings us to the question as to the actual duties and obligations of a CO, and its viable extent to avoid stretched expectations. There cannot be a straight-jacket formula, as this depends on the nature of the violation of a particular category of regulations under SEBI PIT.
3. Responsibilities of a CO – SEBI (PIT) Regulations 2015
Before proceeding to the liabilities of a CO, it is important to delineate the main obligations of a CO as per SEBI (PIT) Regulations. These are given below:
Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations [Reg 9(3)].
The CO must review the trading plans submitted by designated persons. For doing so, he can ask them to declare that he does not have UPSI or that he must ensure that the UPSI in his possession becomes generally available before he commences his trades [Reg 9(3)]. The CO shall report to the board and shall provide reports to the Chairman of the Audit Committee, or to the Chairman of the board at such frequency stipulated by the board, being not less than once a year [Reg 9(3)].
All information shall be managed within the organisation on a need-to-know basis, and no UPSI shall be conveyed to any person except in furtherance of legal duties, subject to the Chinese wall procedures [Reg 9(3)].
When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds [Reg 9(3)].
The timing for re-opening of the trading window shall be determined by the CO, upon considering several factors, including the UPSI becoming generally available and being capable of assimilation by the market, which shall not be earlier than forty-eight hours after it becomes generally available [Reg 9(3)].
Before approving any trades, the compliance officer shall seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI. He shall also have regard to whether such a declaration is capable of being inaccurate. The compliance officer shall confidentially keep a list of certain securities as a “restricted list”, which shall be the basis for reviewing applications for pre-clearance of trades [Reg 9(3)].
These are some of the duties specified in the Regulations. However, the extent of liability of the CO arising from the aforesaid duties requires determination.
4. Potential liabilities of CO:
To determine the extent of obligations of a CO with respect to disclosures, records, or any compliance, there is a need to segregate the duties of a CO into specific categories crafted according to the several aspects to be considered while ensuring adherence to the PIT regulations. In this direction, an effort has been made below:
Closure of Trading window:
A CO cannot be held responsible for not closing the window for certain traders, if the UPSI was not disclosed by the designated person or if the person executed a trade much before the UPSI becomes generally available, in contravention of the trading plans approved or if the disclosure was concealed inadvertently by the board[4].
A CO can also not be held liable if an insider trades in the securities of the company with UPSI, without obtaining pre-clearance from him, even after asking the person to disclose UPSI. He cannot claim that he did not close the trading window on the grounds of lack of awareness of a demand notice received from an operational creditor, which was the start date of UPSI, upon being disclosed to the stock exchange.[5]
So, it is important to understand that a Compliance Officer is not expected to possess perfect foresight, but to exercise prudent diligence. When the trading window is closed in good faith, established procedures are adhered to, and no proof of negligence or systemic failure exists, regulatory liability cannot be imposed on a CO merely on the basis of retrospective evaluation of his inherent duty[6]. He must tend to certain nuances (such as whether the issue of ESOPs is permissible during the window closure)[7], and employ the best professional judgment to red-circle information as UPSI to ensure effective closure of the trading window without breaches.[8]
Maintenance of structured digital database (SDD):
A CO can be held liable for not maintaining SDD as per Annexure 9 of the guidance note on insider trading. However, the SDD must be “real-time and tamper-proof”. The CO would not be held liable if no particular system/controls existed, such as an audit trail mechanism to secure the SDD and prevent leaks. However, citing delay in procurement of software, accidental omissions[9] or the lack of manpower to scrutinise bulky entries of transactions[10] cannot be regarded as valid arguments by a CO.
It is also pertinent that the CO of a listed company adheres to the standard operating procedure for filing the SDD certificate with the stock exchange within a particular deadline. Failure to do so shall attract the following actions by the exchange within 30 days from the due date of filing the SDD certificate: a. Display the name of the company as “non-compliant with SDD” and the name of the compliance officer on the SE website; b. No new listing approvals will be granted (except for bonus issue and stock split); among other actions.[11]
Verifying documents given by the Board:
The SAT has held in the appellate order of V Shanker vs SEBI, taking reference from the case of Prakash Kanungo, that compliance officers are not responsible for re-auditing board-approved documents related to any information on securities, transactions, etc, to test their financial literacy[12]. As seen in the definition, a CO shall work under the supervision of the board and cannot question the decisions of the board. Ergo, he cannot be held liable for making invalid, board-approved disclosures per Reg 7 of the regulations.
Trading by designated persons: Granting of Pre-Clearance and Contra trade restrictions
Pre-clearance becomes a mandatory action in cases where a trading plan has not been submitted/approved by him. The CO must ensure that no designated person executes a trade after expiry of 7 days from the date of granting pre-clearance [13] and must consider the possibility that the declaration given by the person may turn inaccurate.
Prima facie, it is important that the CO can effectively assess and discern a piece of information as UPSI, and the possibility of traders possessing UPSI, before giving a nod. The SEBI has held that a CO is expected to comprehend that the materiality of an event lies not only in its price tag but in its ability to shape market perception. He can be held liable if he limits his view to on-record numerical data, and not the quantum of the event.[14] For instance, the knowledge related to setting up a branch in a higher strategic area amounts to UPSI, and if clearance was granted to those in possession thereof, the CO will be penalised for lack of diligence.[15] Furthermore, his inaction is tagged as dereliction of duty when he couldn’t foresee a contra trade by a person who was granted pre-clearance for “dealing in the shares of the company”, on grounds of being “occupied with work”.[16]
However, a CO cannot be held liable for a bona fide lack of knowledge of the exposure of a Designated person to UPSI on the very date of granting pre-clearance to that person. In such a case, the CO cannot be held responsible for any trade executed by such a person while in possession of UPSI [17], but compelling evidence must be furnished by the CO to back his claim of genuine unawareness.
Finally, it is the core duty of the CO to promptly inform the same to the stock exchange(s) where the concerned securities are traded, in case any violation of Regulations is observed[18]. The CO can take assistance from the chief investor relations officer (CIRO) if it is the company’s discretion to designate two separate persons as CIRO and CO, respectively, for meeting specified responsibilities as to the dissemination of information or disclosure of UPSI[19].
5. Conclusion
A compliance officer is designated as a key managerial person. His role is not one of flawless foresight but of demonstrable diligence. As underscored in Rajendra Kumar Dabriwala v. SEBI[20], the responsibility for compliance must not be burdened on a single individual—it must be embedded within the organisational fabric in the backdrop of PIT regulations. To that end, building a resilient compliance ecosystem can enable a CO to define its limitations effectively while ensuring that inherent obligations are fulfilled with efficiency. This requires adopting formalised Standard Operating Procedures (SOPs), automated monitoring tools, structured checklists[21] for promoters, directors, and intermediaries to map recurring corporate events, and AI-assisted detection of UPSI, among other measures.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-16 21:00:562025-10-16 22:40:24Defining Duty: Extent of Liability of a Compliance Officer under Insider Trading Regulations
On October 13, 2025, SEBI vide its Circular has prescribed a set of disclosures required to be placed before the audit committee and shareholders for approval of RPTs, the value of which do not exceed 1% of annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity or Rupees Ten Crore, whichever is lower (‘Moderate value RPTs’).
This threshold has been introduced to facilitate ease of compliance with Industry Standards Note (‘ISN’) for RPTs over Rs 1 crore [para 5.3.2 of SEBI BM agenda dated September 12, 2025].
In this article, the author analyses the interplay of these distinct disclosure norms and also points out the impractical inclusion of shareholders for placing this information.
Since, the circular has been rolled out in furtherance of ISN, the RPTs can now be classified as follows for the purpose of checking their applicability under ISN-
Particulars
Threshold
Applicability of ISN
Disclosures
Small value RPTs
< INR 1 crore
NA
As per rule 6A of the MBP Rules and Reg 23(3) of LODR
Moderate RPTs
Lower of < 1% of annual consolidated turnover or 10 crores but exceeding 1Cr
NA
As per SEBI Circular dated October 13, 2025
Other RPTs
> 1% of annual consolidated turnover or 10 crores
Applicable
As per para A, B, C of ISN, as may be applicable
Therefore, the minimum information required to be placed before the audit committee and shareholders (in case of material RPT) should be as per the disclosures stated above.
Effective date for compliance with the Circular
The Circular is effective from 13th October, 2025 (‘Effective Date’) and hence, any Moderate value RPTs placed for consideration on or after the effective date will require placing of the information provided in the Circular.
Further, it is also important to understand that this Circular applies for both approval as well as modification or ratification of Moderate Value RPTs, hence, in cases where the original transaction has already been approved and further modifications are intended, the instant Circular comes into action.
Original Approved Transaction Value (INR in crs)
Approved on
Value of Modification post Effective Date(INR in crs)
Applicability of ISN
Applicability of Circular
500
August, 2025
100
Yes
No
100
July, 2025
9
No
Yes*
70
September, 2025
0.75
No
No
*Assuming the lower threshold being 1% of annual consolidated turnover of INR 9 crores.
Analysis w.r.t Material RPTs
Pursuant to reg 23, a transaction with a related party is considered material, if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds rupees one thousand crore or ten per cent of the annual consolidated turnover of the listed entity. The identification of material RPTs is thus, based on all transactions, regardless of the nature of such transactions, taken together, for determining the value of transactions done with a related party, as material.
Similarly, in the present circular, the threshold for Moderate value RPTs is capped at lower of 1% of the annual consolidated turnover or 10 crores on an aggregate basis with the same related party in a financial year.
Provided that if a transaction with a related party, whether individually or taken together with previous transaction(s) during a financial year (including transaction(s) which are approved by way of ratification).
Such aggregation and capping of transactions at 10 crores creates an impractical scenario of such RPTs crossing the materiality threshold (under Reg 23) and warranting disclosures under this Circular as far as information before shareholders are concerned. The following scenarios illustrate the impractability.
Case
Consolidated Turnover
Materiality threshold under Reg 23
Threshold for Moderate value RPTs
Value of RPTs proposed to be undertaken on aggregate basis
Whether shareholders approval is required?
Applicability of Circular / ISN?
Company X
500 crores
50 crores
5 crores
4 crores
No
Circular, but only limited to AC disclosures
15 crores
No
ISN (Part A & B)
60 crores
Yes
ISN (Part A & B); (Part C applies only if any particular transaction amongst the 6 items in itself is material)
Company Y
1500 crores
150 crores
10 crores
6 crores
No
Circular, but only limited to AC disclosures
13 crores
No
ISN (Part A & B)
170 crores
Yes
ISN (Part A & B); (Part C applies only if any particular transaction amongst the 6 items in itself is material)
Company Z
150 crores
15 crores
1.5 crores
1 crore
No
No- small value RPT
3 crores
No
ISN (Part A & B)
18 crores
Yes
ISN (Part A & B); (Part C applies only if any particular transaction amongst the 6 items in itself is material)
Company Q
50 crores
5 crores
0.50 crores
2 crores
No
ISN (Part A & B)
It is imperative to highlight that while the Circular requires presenting information before the shareholders in case of material RPTs, given the ambit of transaction value for which this Circular has been rolled out i.e. lower of 1% of consolidated turnover or 10 crores, it will have no relevance as can also be seen from the table above. Therefore, it is an unlikely situation where the information prescribed under Para B of Annexure 13A of the Circular will be actually required to be placed before the shareholders.
Conclusion
SEBI, in its Board Meeting (para 5.4 of BM agenda), has indicated its intent to grant relaxation to entities with lower turnover in respect of the information to be furnished for approval of RPTs to the Audit Committee only. The Circular, however, prescribes the list for shareholder’s information also. As discussed above, given the threshold, the same becomes irrelevant. It is important to bring this to the knowledge of the regulators so that appropriate changes are carried out.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-14 19:51:592025-10-14 22:29:04Moderate Value RPTs : Interplay of disclosure norms and impracticalities
The 2025 Amendments to the AIF Regulations has brought substantive changes to the regulatory landscape for angel funds, moving the same as a category of Cat I Funds, as against a sub-category of Venture Capital Funds. However, regulatory oversight strictens, with the access exclusively limited to accredited investors only. In view of the redundancy of a “scheme” in the context of angel funds (see below), the same has been omitted and replaced with each investment based participation of investors.
Angel Funds, a unique type of start-up friendly investment vehicle, was formally recognised by SEBI in the year 2013 with the introduction of Chapter III-A to the SEBI (Alternative Investment Funds) Regulations, 2012. As on 31st March 2025, there are 103 registered Angel Funds with a total commitment of Rs. 10,138 crores. The regulatory landscape for angel funds has been substantially revamped with the notification of SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, dated 8th September, 2025. The Amendment Regulations are further supplemented with a Circular dated September 10, 2025 prescribing the specific conditions and modalities pertaining to the provisions applicable to Angel Funds.
The amendments are based on the Consultation Paper dated 13th November, 2024, released post the Union Budget announcement of abolishment of angel tax (see a brief presentation here), for operational clarity and strengthening the governance and disclosure requirements for angel funds.
Uniqueness of structure
The uniqueness of Angel Funds lie in its structure. Unlike a typical AIF, in the case of Angel Funds, the investors provide specific consent to each investment opportunity. As such, there is no proportionality between the contribution of the investors in a scheme of AIF vis-a-vis the indirect contribution made in an investee company by such AIF scheme. As such, as against the usual “scheme” structure, an Angel Fund follows an “investment” structure.
Applicability
The Amendment Regulations are effective from the date of publication of the same in the Official Gazette, viz., 8th September 2025. The Circular was issued on 10th September, 2025. Further, in order to facilitate transition of the existing Angel Funds, additional timeline has been provided for compliance in some cases.
Exclusive to AIs: eligibility to act as an angel investor
Pursuant to the amendments, it is only an Accredited Investor who is eligible to be onboarded as an angel investor in an angel fund. The difference between the eligibility conditions are tabulated below:
Particulars
Angel Investors (Erstwhile Framework)
Accredited Investors (Amended Framework)
Categories of investors
Individual/Body corporate/AIF/ VCF
IndividualHUF Family trust Sole proprietorship Body corporate Trust other than family trust Partnership firm Government, Govt development agencies, QIBs, FPIs, Sovereign Wealth Funds etc – exempt from accreditation requirement
Eligibility criteria
In case of individual, Net tangible assets > Rs. 2 crs (excluding principal residence) andHas experience of Early stage investment or Serial entrepreneur or SMP with at least 10 years’ experience
In case of 1 to 4, either of the following: Annual income > Rs. 2 crs or Net worth > Rs. 7.5 crs out of which at least Rs. 3.75 crs is in the form of financial assets.Annual Income ≥ Rs. 1 cr + Net Worth ≥ Rs. 5 crs, out of which at least Rs. 2.5 crs is in the form of financial assets.In case of 7, each partner to separately meet aforesaid criteria
In case of body corporate, networth > Rs. 10 crs
In case of body corporate, networth > Rs. 50 crs
Trust other than family trust, networth > Rs. 50 crs
Independent accreditation
Not applicable
Applicable
Not only the eligibility conditions are stringent in case of AIs as compared to erstwhile concept of angel investors, but the mandatory “accreditation” criteria would be a primary factor that may lead to elimination of many investors who were earlier eligible for acting as an angel investor.
Transition period
For angel funds registered on or before 10th September 2025 (the date of issue of Circular), a timeline of 1 year, that is, upto 8th September 2026 has been specified, for transition into the new framework. During this period, offers can be made to upto 200 non-AIs.
No new contribution can be accepted from non-AIs post 8th September, 2026, though the investors continue to hold their existing investments already made in the angel fund.
Regulatory regime for Angel Funds: old v/s new
Topic
Old Framework
New Framework
Rationale
STRUCTURE OF THE FUND
Category of AIF [Reg 19A(1)]
Sub-category of VCF under Cat -I
Sub-category of Cat – I
In view of the unique features of Angel Funds as compared to VCFs. See differences below
Schemes under Fund [Reg 19E]
Allowed
Not allowed
Since there is practically no distinction between a “scheme” and an “investment” in the context of an angel fund, hence, the concept of scheme is not relevant for an angel fund.
Filing of placement memorandum with SEBI [Reg 19D(4)]
Not applicable
PPM to be filed along with application for registration through merchant banker for comments of SEBI
Previously, term sheets for each Schemes were filed with SEBI for “informational” purposes. The requirement has been substituted with filing of PPM at the time of registration itself.
Filing of the term sheet for schemes with SEBI [Reg 19E]
Mandatory, 10 days from launch of scheme
Not applicable
Term sheet is filed for material information of each Scheme, not relevant since scheme structure is omitted for angel funds
Minimum continuing interest of Sponsor/ Manager [Reg 19G]
2.5% of corpus or Rs. 50 lacs, whichever is lower
0.5% of investment amount or Rs. 50,000, in each investee, whichever is higher
To ensure that manager/sponsor has interest in every investment
INVESTMENT IN ANGEL FUND
Eligibility of investor [Reg 19D(1)]
Angel Investor based on certain eligibility conditions specified therein (see later in this article)
Accredited Investor KMP of Angel Fund/ Manager
To ensure proper verification of the risk appetite and informed decision making capabilities of the investor, since investment in start-ups are highly risky. To enhance skin in the game
Minimum corpus [Reg 19D(2)]
Rs. 5 crore
NA
NA since each investment is based on prior consent of investor, the concept of a common corpus is irrelevant
Minimum investment per investor [Reg 19D(3)]
Rs. 25 Lakhs
NA
No minimum limit since only AIs are allowed to invest
Minimum number of investors [Reg 19D(6)]
Not specified
At least 5 AIs prior to disclosing first close
To ensure sufficient investor interest prior to starting to make investments, in the absence of any minimum corpus requirement.
Maximum number of investors
200 in a scheme [Reg 19E(2) – omitted]
No limit
Since only AIs are eligible who are independently verified, sufficient guardrails exist. No cap on number of investors facilitate scaling up of the industry and enhance capital flow to start-ups. Further, ICDR Regulations have been amended to include AIs within the meaning of QIBs for the purpose of investment in angel funds, accordingly, the limit of 200 as per section 42 of the Companies Act, 2013 shall also not apply in case the AIF is formed as a company.
INVESTMENT BY ANGEL FUNDS
Prohibition from investment in certain investees [Reg 19F(6)]
Companies with family connection with any of the angel investors.
No investments from such investors who are related party to an investee
See below.
Follow-on investment in existing investee [proviso to Reg 19F(1)]
Not permitted once the investee ceases to be start-up
Allowed subject to the condition that the Fund’s post-issue shareholding percentage does not exceed pre-issue shareholding percentage
To protect and preserve the value of the existing investments of Angel Funds in an investee. Investment cap is to ensure that while pre-emptive rights can be exercised by angel funds, does not result in dilution of the regulatory intent behind angel funds
Minimum investment in an investee [Reg 19F(1)]
Rs. 25 Lakhs
Rs. 10 Lakhs
The increase in range is to reflect the growth of angel ecosystem, providing more flexibility to the Angel Funds
Maximum investment in an investee [Reg 19F(1)]
Rs. 10 crores
Rs. 25 crores (including upon follow-on investment)
Lock-in on investments [Reg 19F(3)]
1 year
6 months – if sold to a third party subject to AoA of investee. 1 year – in other cases, including buyback, sale to promoters of investee/ associates of promoters
To maintain stability of investments while providing flexibility of favourable exit to the angel fund
Minimum number of AIF investors in each investee [Reg 19F(5)]
No such limit
2 investors
Also serves as a check against misuse of angel fund structure for facilitating investments from single investor
COMPLIANCES APPLICABLE TO ANGEL FUNDS
Exception from application of certain provisions of the Regs [19B (2)]
Reg 10(a), (b), (c), (d), (f) – Conditions w.r.t. Investment in AIFReg 12 – Filing of Scheme Reg 14 – Listing of unitsReg 15(1)(a), (c), (e) – Conditions w.r.t. Investment by AIFReg 16(1)(b) – OmittedReg 16(2) – Additional conditions applicable to VCFsReg 20(21) – Rights of investors pro rata to their contribution
Following additional exceptions: Reg 15(da) – AIFs making investments through multiple layers of AIFsReg 16(1)(a) – Types of investeeReg 17 – Conditions for Cat II investments Reg 18 – Conditions for Cat III investments
The exceptions are majorly in alignment with the non-Scheme structure of the Angel Funds
Annual audit of compliance with terms of PPM
Not applicable
Mandatory, if total investment (at cost) exceeds Rs. 100 crs
Exemption to continue for smaller Angel Funds, larger Angel Funds be subject to audit of PPM
Reporting in relation to performance benchmarking
Not applicable
Applicable from FY 25-26
To improve transparency
Related Party v/s Family Connection
Angel Funds are not permitted to accept contributions from such investors, who are related parties to the investee company in which the investment is to be made. Here, the definition of “related party” is to be taken from Reg 2(1)(zb) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The definition, in turn, refers to Companies Act and applicable accounting standards as well.
Various questions arise:
Who prepares the list of related parties as per LODR definition? Is it the prospective investee that is responsible?
Can the investment manager and investor be absolved of their responsibilities of verification of whether or not the investor is a related party to the investee?
What if the investor becomes a related party of the investee entity, subsequent to making such investments?
The change from the term “family connection” to “related party” seems to simplify the identification for the prospective investee company, since such companies would have already identified related parties in terms of section 2(76) of CA, 2013 and applicable accounting standards. The only additional categories for such investees would be:
Promoters and members of promoter group, and
Shareholders holding 10% or more equity shares in the company on a beneficial interest basis.
Concluding Remarks
The amended regulatory framework makes it stringent for angel funds to raise funds from angel investors, restricting the access to accredited investors only. With the limited number of investors “accredited” registered in India (649 as on May 2025), early stage start-ups might face obstacles in startup funding. While SEBI has proposed ease of accreditation requirements, the same has not been made effective yet. As on 30th June 2025, data shows that the number of VCFs are much higher than the number of angel funds, and with the amended requirements, it might so happen that the investors would prefer VCFs over angel funds, as a means of investing in start-ups.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-10-04 15:55:452025-10-10 12:12:52Angel Funds 2.0: Navigating the New Regulatory Landscape
– 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.20,000
10%
20,001 – 40,000
2,000 Crs + 5% above Rs. 20,000 Crs
> 40,000
3,000 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
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 amendments
Existing provisions
Post amendments
≤ 1,600 Cr
25%
NA
1,600 Cr < MCap ≤ 4,000 Cr
400 Crs
Within 3 years from listing
4,000 Cr < MCap ≤ 50,000 Cr
10%
Within 3 years from listing
50,000 Cr < MCap ≤ 1,00,000 Cr
10%
1,000 Cr and at least 8% of post issue capital
Within 3 years from listing
Within 5 years from listing
1,00,000 Cr < MCap ≤ 5,00,000 Cr
5000 Cr and atleast 5% of post issue capital
6, 250 Cr and 2.75% of post issue capital
10% – within 2 years 25% – within 5 years
If 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 Cr
15,000 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
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.
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
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
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
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
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.
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.20,000
10%
2,000
20,001 – 40,000
2,000 Crs + 5% above Rs. 20,000 Crs
3,000
> 40,000
3,000 Crs + 2.5% above Rs. 40,000 Crs
5,000 (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 transaction
Disclosure Requirements
Applicability of ISN
< Rs. 1 crore
Reg 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’)
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:
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.
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.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-09-14 20:47:202025-09-14 21:12:15Relaxed Party Time?: RPT regime gets lot softer
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