RISK MANAGEMENT POLICY– A tool of risk management

Ridhima Jain | Executive | corplaw@vinodkothari.com


As in case of life, so also in business, risks are unavoidable. However, large organisations cannot afford to have a casual and pro-tem approach to risk management, as severity of some of the risks may cause significant erosion to shareholder value, even to the extent of affecting the solvency and liquidity of companies. Therefore, every company has to methodically identify, analyse, grade, mitigate and manage risks comprehensively. As size and complexity of organisations have increased, so also the need for proper risk management.

Risk management policy may be taken as a perfunctory compliance, and therefore, may be just a document that sits on the website of the company. On the other hand, a proper approach may be to use the risk management policy as the contextual document which assimilates the company’s approach to risk management, and may continuously act as the guide to the executive management.

Risk refers to the uncertainty in transactions undertaken by an organisation, which may be measured in terms of deviation from predetermined targets or probability of loss or inadequate profits. Risk often ranges from financial to non financial risks. Financial risks have an immediate bearing on finances of an organisation and may be in the form of credit risks, liquidity risks, operational risks or obsolescence risk. On the other hand, non-financial risks may be classified as strategic risks, compliance risks, fraud risks and reputation risks. Risk, by its very nature, is an inherent part of every business and its intensity only proliferates with the paced-up globalisation and digitalisation. This becomes evident from the increasing importance of the risk management function at the strategy making table of the concerned entities.

In this article, the author dwells on the importance of risk management framework for any organisation and also discusses the components of an ideal risk management policy.  What goes in a risk management policy holds a fair amount of significance as the entire risk management framework is structured on the basis of the policy formulated in this regard.

In this context, risk management refers to the process followed by an organisation to identify, understand and evaluate the risks faced by it and effectively mitigate the detected risks. It may be construed as a macro process comprising various micro processes like risk identification, risk analysis, risk assessment and risk mitigation.

The rise in importance of risk management may be attributed to the realisation that any transaction may be fruitless if the underlying risk goes unrecognised. Unrecognised risks are more dreadful than recognised risks and any risk for which the organisation is not prepared for, may become unmanageable at the later stage of the process. An efficient risk management framework also facilitates development of a robust contingency plan and helps save costs, which the organisation may have spent on firefighting the risk.

Failures arising out of poor risk management have persistently resulted in downfall of big corporates. Examples may include Nokia, which failed to determine appropriate strategy for their business and surrendered to strategic risks or Satyam Computers which failed to manage fraud risks. Certainly, regulators like the RBI have imposed monetary penalties on NBFCs and banks for their inability to effectively address compliance risks. Such actions are not limited to monetary penalties, as in case of Srei Infrastructure Finance Limited the regulator took the company to the NCLT to initiate a resolution process against it.

Approach towards risk management

It is important to approach risks in a suitable manner as it serves the spirit underlying the risk management framework. The manner of approaching risk is an organisation specific element, driven by numerous factors such as risk faced by the industry in which it operates. Even after determining risks faced by an industry, the risk approach would be influenced by the functioning model of the particular organisation. For instance, a bank’s risk mitigation strategy may be primarily focussed on credit risks whilst a trading company may focus on operational risks. However, a trading company having international operations may give equal weightage to currency and legal risks.

Even though the risk approach of an organisation differs, an ideal approach should determine key risks after considering both external and internal influencing factors. Along with, for efficient management of risk, the approach should undertake a “top-down approach” by which management philosophy is clearly communicated to the grass root level employees as well as a “bottom-up approach” by which risks detected by employees at each level are communicated to the top management. The two-way approach will lead to fostering a risk aware culture throughout the organisation.

The primary responsibility of the risk management function may be reposed on the board of directors or the risk management committee. Apart from the companies mandatorily required to formulate a risk management committee, other companies may also formulate such committee to give undivided attention to the risk management function. Also, companies may formulate sub teams whose main role may be to handle specific risks which may be significant for the company. For instance, an organisation engaged in the FMCG segment may constitute a commodity risk management team for managing volatility in commodity prices. Further, an organisation may constitute a separate policies or separate committee altogether for specific risks. For instance, an organisation may formulate business risk and assurance committees to specifically review business and strategic risks.

All in all, an organisation’s approach towards risk management is primarily influenced by the importance it gives to the risk management function and relevance of the risks to its operations. Accordingly, risk management policy of the organisation should be framed to reflect the approach adopted by  it towards the risks faced by it.

Risk Management Policy

Risk management policy may be construed as a document regulating risk management function in an organisation. Having discussed the importance of risk management, we understand that the function is imperative and flows through every department in an organisation. Every employee in the organisation should be made aware of the flow of risk management process which is ensured by a well documented risk management policy. In essence, such policy provides a comprehensive guide to the risk philosophy of the organisation. The policy lays down a foundation on which the whole enterprise risk management (‘ERM’) is built. Once the ERM has been set up, the policy facilitates integration and gives direction to efforts of all the personnel in the organisation towards achieving common risk management goals such as minimisation of adverse impacts of a project or exploring unravelling opportunities.

Contents of risk management policy

Considering the contents of risk management policy, the coverage of the policy should be broad to provide an enhanced scope towards the function. That is, the policy should provide for all the foreseeable risks that the organisation may face in its future.

Further, the policy should not  simply be a document, incorporating or rather reiterating the regulatory requirements, but it should also encompass the probable risk areas. An ideal policy would include:

Brief background of the organisation Discussion of the background of the organisation would provide an enhanced understanding about the source of risks arising in the course of the business.
Objectives and importance of the policy Whilst performing any activity, besides knowing what is to be done, it is equally important to understand why it is being done. Discussion on the objectives of the policy would give a vision to the reader and enhance the meaning to the upcoming contents of the policy.
Applicability and effective date Prior to understanding any framework it is essential to understand the operations it covers and the date from which it is applicable.
Requirements as per the statute An insight into the regulator’s expectations regarding risk management policy would significantly influence the policy of the organisation. For instance,  the Companies Act, 2013 prescribes that the audit committee of a company shall evaluate the risk management systems. Similarly, the independent directors, as well, should provide independent judgment on issues like risk management and are responsible for integrity of the risk management system.

In this regard, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI (LODR) Regulations, 2015’) also vests enormous responsibilities on the board of directors of the listed entity. Apart from framing a risk management plan, the board of directors are also responsible for defining roles and responsibilities of the risk management committee.

Some of the mandatory compliances with respect to risk management policy are discussed in the forthcoming paragraphs.

Risks faced by the organisation Categories of risks faced by the organisation along with particular risks and description thereof should be clearly specified in the policy. Such specifications would acquaint the reader about the intent behind the entire risk management framework.
Hierarchy of risk management Establishment of such hierarchy is essential for an efficient risk management culture as it provides for an effective flow of risk information. Along with the structure, roles, responsibilities and accountabilities of the hierarchy elements should be clearly defined. More particularly, composition of risk management committee and particulars of appointment of the chief risk officer should be enunciated in the policy.  A broad idea of an ideal hierarchy is shown in the following diagram.

Risk reporting The policy should clearly specify as to which risks will be reported, how the risks will be reported and to whom the risks will be reported in the risk hierarchy. This may be seen as an important element of the whole framework as it is obvious that every risk arising may not have an impact on the organisation. Thus, reporting of such minor risks may waste time and effort of the personnel involved.
Treatment of different types of risks The organisation may specify treatment of risk on the basis of classifications made by it. For this purpose, risks may be broadly classified as controllable or uncontrollable risks, inherent or residual risks.
Business continuity plan The organisation should indicate development of such plans in its risk management policy. The plan should cover recovery plans after any major disruption faced by the organisation. A mention of such a plan would assure the policy users of the organisation’s preparedness of risks arising in all perceivable circumstances.
Risk management process The central element of the framework typically involves the procedure for risk management in the organisation. Ideally the risk management process should be carried out in the following manner:

For instance, when considering fraud risks, firstly, lacunas in the organisational structure wherein fraud may be perpetrated are identified. The identified areas turn out to be the origin of fraud risk. Secondly, an analysis is made as to what is the probability that the risks will materialise. Any risk with high probabilities should be given due attention. Thirdly, the impact on the organisation when the risk materialises should be assessed. The output from this stage is used to prioritise risks according to their probability of occurrence and their impact. Finally, risks are mitigated by adopting a suitable risk mitigation strategy.

Risk management tools The organisation may provide a description of the tools utilised by it in the process of risk management. Common tools used by the organisations are:

–        Assessment matrix: The matrix highlights velocity of the risks faced by the organisation. It also suggests the impact of the potential risk in various functions of the department which are measured by assignment of specific scores. The criteria for assignment of scores may also be specified in the report.


–        Stress tests – Organisations conduct stress tests to study the impact of risks getting materialised. Stress tests are mandated for banks and NBFCs in India.


–        Risk registers: These are registers wherein all estimated risks and actual risks faced by the organisation are recorded along with their details such as their risk category, likelihood of occurrence, their impact and mitigation plan is suggested.


–        Department-wise risk summary: The organisation may, after identifying risks faced by it as a whole, further bifurcate into risks faced by individual departments.

Review of risk management tools Apart from the regular risk reporting, the results derived from risk management tools may be reviewed periodically to ensure that any risk element does not go undetected. For example, there may be provisions for submission of a report on risk register on a half yearly basis. In this regard, formats for such submissions and a calendar accommodating timelines for all submissions may be incorporated in the policy.
Risk audit Even though the risk management function is a complete function, its efficiency is enhanced when integrated with internal audit. Audit of the risk management framework provides an assurance regarding the framework and brings in light deficiencies in the framework. It also indicates the level of effectiveness of internal controls.
Periodicity of review The intervals at which the policy will be reviewed should be clearly specified as well as a schedule should be attached to describe intricacies of the amendment.
Dissemination of the policy The manner and channels used for disclosing the policy should be expressly mentioned.


Regulatory prescriptions regarding risk management policy

In addition to the aforesaid, it is mandatory to comply with the broad guidelines laid by the specific regulators governing an organisation which may be read as:

The Companies Act, 2013: Section 134(3)(n) of the Companies Act, 2013 prescribes that the report of the board of directors shall contain a statement regarding the risk management policy of the company. Such policy should contain all the elements of risk more particularly, elements of risk which may threaten the existence of the company.

Securities and Exchange Board of India: Regulation 17 of the SEBI (LODR) Regulations, 2015 reposes responsibility of framing and implementing the risk management plan on the board of directors of the company. Further, Schedule II of the Regulations prescribes that the risk management committee is responsible for laying down a detailed risk management policy which shall mandatorily include:

  • Framework for identification of risk particularly financial, operational, sectoral, sustainability (particularly, ESG related risks), information, cyber security risks.
  • Business continuity plan of the company.
  • Risk mitigation systems and internal control processes for mitigation of detected risks.

Also, the committee has the responsibility of overseeing implementation of risk management policy and periodic review of the same.

Reserve Bank of India: In the context of NBFCs, the regulator lays specific stress on liquidity risk management framework to be adopted by applicable For the purpose, a liquidity risk management policy is to be laid down by the board of directors of the NBFC which shall provide for:

  • Manner of maintaining liquidity at all times;
  • Entity-level liquidity risk tolerance limits;
  • Funding strategies to be adopted by the NBFC to maintain its liquidity levels;
  • Prudential limits;
  • System for periodic review of liquidity of the NBFC and assumptions used in liquidity projection;
  • Framework for stress testing;
  • Contingent funding plan;
  • Nature and frequency of management reporting;

Further, both banks as well as NBFCs are required to structure an asset liability committee to provide a balance between those two aspects of the organisation. However distinction lies in their framework as liquidity is the most stressed point in NBFCs, but in case of banks, the RBI has laid out a more comprehensive “risk appetite framework” which prescribes risks to be managed at an aggregated level and not to be restricted at a specific risk/function. Apart from other specifications, the framework requires risks to be considered from qualitative as well as the quantitative perspective. The prescribed framework aims to mitigate financial risks, more specifically, interest rate and liquidity risks.

The gravity of the framework can be derived by solely looking at the strict composition and quorum requirements of the risk management committee. In this regard, the RBI has also prescribed an “Internal Capital Adequacy Assessment Process” in line with the Basel norms, to be laid down at individual bank level as well as at the group level to analyse significant risks faced by the banks. This may be considered as the most meticulous prescription by a regulator regarding the risk management framework, the reason being obvious, that the banks play a pivotal role in the capital flow of the economy.

Insurance Regulatory and Development Authority of India: The regulator, vide its corporate governance guidelines for insurers, reposed the responsibility of laying down a risk management framework and a risk policy by the risk management committee of the insurer. Specific stress has been laid down on fraud risk management faced by the insurer.


From the foregoing, we derive that risk management plays a crucial role in an organisation’s functioning. Thus, it is essential to have a sound risk management system. Such a system arises from a well drafted risk management policy. It is safe to say that risk management policy is the first step towards building a risk management framework. However, merely establishing a risk management policy does not assure a sound risk management framework. The execution of the plan so laid down is an equally important aspect to be looked at.


Our other resources can be accessed below:

  1. Risk-based Internal Prescription for Audit Function – https://vinodkothari.com/2021/03/risk-based-internal-prescription-for-audit-function/
  2. Liquidity Risk Framework: A snapshot – https://vinodkothari.com/2019/11/liquidity-risk-framework/
  3. Chief Risk Officer: Strengthening risk management practices – https://vinodkothari.com/2019/05/chief-risk-officer-cro/
  4. Clubbing of Committees – https://vinodkothari.com/wp-content/uploads/2017/03/Clubbing_of_Committees-1.pdf


Revised formats for limited review/ audit report for entities with listed NCS


Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:

Links to SEBI circulars and amendments:

  1. Revised formats for limited review/audit report for issuers of non-convertible securities (dated October 14, 2021)  – https://www.sebi.gov.in/legal/circulars/oct-2021/revised-formats-for-limited-review-audit-report-for-issuers-of-non-convertible-securities_53279.html
  2. Revised formats for filing information for issuers of non-convertible securities (dated October 05, 2021) – https://www.sebi.gov.in/legal/circulars/oct-2021/revised-formats-for-filing-financial-information-for-issuers-of-non-convertible-securities_53136.html 
  3. Revised formats for financial results and implementation of Ind AS by listed entities which have listed their debt securities and/or non-cumulative redeemable preference shares (dated August 10, 2016)- https://www.sebi.gov.in/legal/circulars/aug-2016/revised-formats-for-financial-results-and-implementation-of-ind-as-by-listed-entities-which-have-listed-their-debt-securities-and-or-non-cumulative-redeemable-preference-shares_32958.html 
  4. Format for financial results for listed entitites which have listed their debt securities and/or non-cumulative redeemable preference shares (dated November 27, 2015) – https://www.sebi.gov.in/legal/circulars/nov-2015/format-for-financial-results-for-listed-entities-which-have-listed-their-debt-securities-and-or-non-cumulative-redeemable-preference-shares_31120.html
  5. SEBI(LODR)(Fifth Amendment)Regulations, 2021 (dated September 07, 2021) – https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html  

Managing significant transactions & arrangements with subsidiaries

– Decoding Regulation 24 of Listing Regulations

By Payal Agarwal and Himanshu Dubey | corplaw@vinodkothari.com

The seamless flow of information between a holding company and its subsidiaries is imperative for effective governance on the level of a group. Since listed companies in India often function with complex structures having a lot of subsidiaries, it is not feasible for the holding company to deliberate upon all the matters of its subsidiary. Therefore, if not all, at least the significant transaction of the subsidiaries shall be placed on the board of the holding company. Regulation 24 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) provide for the same. The same though sounds commendable but is also surrounded by various practical difficulties while its implementation. Sometimes the compliance with the aforesaid provision becomes merely perfunctory. If too much is reported to the holding company, the relevance is lost while if too less is reported then the materiality is lost.

Need of fostering corporate governance requirements with respect to subsidiaries

In the normal course of business, it is very common for companies to have subsidiaries. However, the significance of such subsidiaries on the overall performance of the holding company varies. In case of listed companies, since the interest of the public at large is at stake, it becomes imperative that such stakeholders shall not only be informed about the listed company but also its subsidiaries. Ofcourse, the level and depth of information shall vary depending upon the significance of the subsidiaries as well as the significance of transactions being undertaken by such subsidiaries. Considering the aforesaid, Regulation 24 of the Listing Regulations requires the listed holding company to ensure corporate governance in its unlisted subsidiaries in certain ways. One of such ways is provided under sub-regulation (4) of Regulation 24 (Regulation) which says that the management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.

The above-mentioned requirement was earlier applicable only to material unlisted subsidiaries but pursuant to amendment applicable w.e.f. April 1, 2019, the requirement has now been made applicable to all the unlisted subsidiaries of the listed holding company. However, the requirement though seems unequivocal, it comes with certain anomalies and practical difficulties. The author tries to present an analysis of the Regulation so as to answer the anomalies coming in the way of its practical implementation.

Applicability to subsidiaries

It is very common for a large corporate group to have various subsidiaries which in turn have various subsidiaries under them i.e. step down subsidiaries, from the angle of the ultimate holding company. The possibility of the holding company being listed and the subsidiaries including step down subsidiaries being unlisted is very high. This kind of a structure is very common and can be seen in most of the major corporate groups in India. Since the Regulation talks about subsidiaries, a question might pop up whether it only includes the immediate subsidiaries or the step down subsidiaries as well.

Given the purpose of the Regulation of enhancing corporate governance in the subsidiaries and also the fact that the shareholders interested in the listed company shall be aware of the business being undertaken by the subsidiaries as well. The principle behind this is that on the consolidated level, the performance of the holding company gets affected by the performance of its subsidiaries including its step down subsidiaries. Therefore it is pertinent to have some degree of supervision over them in terms of corporate governance though they are unlisted. Considering this rationale, there seems to be no purpose of excluding the step down subsidiaries from the purview of this Regulation. Hence, the Regulation will  be applicable to both immediate and step down unlisted subsidiaries. Let us understand the applicability of the Regulation under different cases enunciated below:


Case 1: since both the immediate subsidiary and the step down subsidiary are unlisted, the Regulation will apply to both of them and significant arrangements or transactions entered into by them will be reported to the ultimate holding company.

Case 2: since the subsidiary itself is a listed company and the Regulation clearly states that it applies to unlisted subsidiary. Therefore, the Regulation will not apply to the subsidiary. Going further, the step down subsidiary is unlisted, but the holding company just one level above is listed. Therefore, the Regulation will apply to unlisted step down subsidiary in relation to its immediate holding company. The ultimate holding company at the top will not be required to note or review the significant transactions or arrangements of the step down subsidiary under the Regulation.

Case 3: since the subsidiary is unlisted, the Regulation will have to be complied in relation to it. However, going forward to the listed step down subsidiary, since it is itself listed with the stock exchange, the Regulation will not apply as it is applicable only to unlisted subsidiaries.

Issues to address

Regulation 24(4) of the Listing Regulations reads as below –

“The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.”

The following may be require to be identified –

While a plain reading entails the aforesaid questions, a deep analysis of the provisions and on consideration of the practical implications, further issues/questions may arise which have been dealt with at relevant places in this write-up.

Meaning of Transactions or Arrangements

The first question that arises while complying with the requirements of Regulation 24(4) is the identification as to what constitutes transaction or arrangement. While the term ‘transaction’ is not defined, the meaning of the same may be construed from Regulation 2(1)(zc) of the Listing Regulations and Indian Accounting Standard (Ind-AS) 24, defining the term “related party transaction” (RPT) .

The term has been defined as –

A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

Accordingly, the term transaction may be understood to be “a transfer of resources, services or obligations between two parties”. Similarly, arrangements shall mean a plan or programme for undertaking or understanding to undertake such transactions in future.


Assessment of Significance

The second step that comes after identifying the transaction/arrangement is the assessment of significance. For the purpose of Regulation 24(4), a transaction or arrangement is significant if it individually exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately preceding accounting year.

The criteria of significance as provided above requires that the threshold needs to be checked against different parameters “as the case may be”. The parameter to be checked will depend upon the nature of the transaction. Therefore, depending upon the nature of the transaction, the significance shall be assessed against the threshold determined on the basis of figures under relevant head as explained below:


There may be instances where the transaction does not affect any one parameter in isolation but  two or more of the parameters i.e. revenue, expenses, assets or liabilities together. In such cases, an issue may arise as to which parameter has to be considered. In such cases, all the parameters applicable to such a transaction shall be considered. 10% threshold of all such applicable parameters shall be determined and the lowest of such threshold shall be applied for assessment of significance of such transaction.

For example, S Ltd, the subsidiary of A Ltd, has entered into a transaction with Z Ltd, involving sale of goods. Such transaction involves revenue and therefore, significance of such transaction has to be assessed as a percentage keeping the total revenue of the preceding accounting period as the base for deriving such percentage. Say for example, the revenue of S Ltd is Rs. 100 crore in the preceding financial year. Therefore 10% of it will be Rs. 10 crores. Hence, if the value of the transaction being entered by  S Ltd with Z Ltd exceeds Rs. 10 crores, the same will qualify as a significant transaction for the purpose of the Regulation.

However, consider another example in which S Ltd has entered into an arrangement which impacts both the assets and expenses of the Company (creation of a new capital asset involving a huge outflow of cash). In such a case, both the assets and expenses being involved, the significance of the transaction has to be assessed for each of the bases individually and the one that hits the requirement at the lower end shall be taken for assessment of significance. Say for example, the assets and the expenses of S Ltd in the preceding financial year was Rs. 500 crores and Rs. 150 crores each. In such a case, thresholds shall be calculated based on both the figures and the lower of the two shall be the one that will determine the significance of the transaction. In the instant case, the thresholds are Rs. 50 crores and Rs. 15 crores, therefore the lower of the two i.e. Rs. 15 crores will be the one that will be considered. Hence, if the amount of transactions being undertaken exceeds Rs. 15 crores, it will qualify as a significant transaction.


Basis for assessment – standalone or consolidated?

Having settled with the parameter to be considered for various transactions, another question that may tweak our mind is whether the total revenues or expenses or assets or liabilities, as the case may be , has to be considered on a standalone basis or on a consolidated basis for the subsidiary. Here, one has to consider the fact that the compliance of the provision has to be ascertained by the listed holding company. Any company, which is a subsidiary of the subsidiary company, ultimately becomes the step-down subsidiary of the listed holding company thereby attracting Reg 24(4) of the Listing Regulations for reasons as discussed above and reporting its significant transactions or arrangements to the board of the listed company. In view of the same, an inference may be drawn that the aggregate figures for the preceding financial year shall be taken on a standalone basis, and not on a consolidated basis. This will also help in getting a clear picture and involving only those transactions that are actually significant for the subsidiary.

Determination of significance: Transactions/Arrangements based on contract

It is a very general phenomenon in companies to enter into contracts with different parties. Such contracts often extend to years and give rise to transactions. A common ambiguity that may arise in such cases is on determining the amount of such transaction for the purpose of the Regulation. Let us understand this scenario with some examples.

A Ltd., a subsidiary of B Ltd., enters into a rent agreement with X Ltd. The rent agreement extends to 5 years at a total value of Rs. 30 lakhs i.e. at a monthly rent of Rs. 50,000 per month. Now what shall be considered as the value of transaction for the purpose of the Regulation, Rs. 30 lakhs or Rs. 50 thousand? In our view, the total amount attributable to that particular financial year shall be considered for the purpose of the Regulation. In the instant case, assuming that the contract is effective from October 1, 2021, the amount shall be Rs 3 lakhs (rent during the FY 2020-21). Therefore, for assessing the significance of the transaction, the amount of Rs. 3 lakhs shall be compared against the threshold.

In the same case above, even if there has been no specific tenure of the contract but it rather would have only discussed monthly payment of Rs. 50 thousand as rent, still the amount payable in total throughout that financial year shall be taken and not the monthly rent.

The underlying principle is that the total amount of that transaction attributable to that financial year shall be considered as the amount of transaction for assessing significance under the Regulation.

Reporting: decoding the meaning of management and periodicity

Meaning of management

Regulation 24(4) says that “the management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity xxxxxxxxx”. This again comes up with two questions: who constitutes management and what shall be the periodicity for bringing significant transactions or arrangements to the notice of the board of the listed holding company.

Going by the general meaning as well as the intent and purpose of this requirement, the board of directors of the subsidiary as well as the KMPs/other senior executives just a level below the Board should be taken to constitute ‘management’.

Periodicity of reporting

Coming to the question of periodicity, the same has not been specified in the Listing Regulations itself, but left to the discretion of the board. However, the intent of the Regulation is to enhance corporate governance in the subsidiaries. Hence the periodicity should be reasonable enough to capture such a purpose.

Here, one may note that Regulation 17(2) of the Listing Regulations requires the board of the listed company to meet at least four times a year. Further, under Regulation 33, financial results are placed before the board quarterly which also includes results of its subsidiaries (since the results have to be submitted on both standalone and consolidated basis). Therefore, in consonance with the same, the list of significant transactions or arrangements of the subsidiaries should also be placed before the board of the listed company, if not more frequently, at least on a quarterly basis.

De-minimis exemptions – can a leeway be created?

Regulation 24(4) of the Listing Regulations, though very significant in terms of enforcing corporate governance requirements and ensuring transparency in respect of the unlisted subsidiaries of the listed company, may sometimes prove extraneous in the spirit of law. There may be cases where the subsidiary as a whole may be too small to have any significance on the accounts of the holding company.

A classic example of the same may be in case of a company, as a listed holding company, having a paid-up capital of Rs. 50 crores or above, having a subsidiary with total asset size of Rs. 1 crore. In this case, the total assets of the subsidiary amounts to mere 2% of the total asset size of the listed company. Here, a transaction involving purchase/ sale of an asset of Rs. 10 lacs will fall within the meaning of a significant transaction for the subsidiary company, however, will have a minimal impact on the listed holding company.

In such cases, going by the letter of the law, such transactions, even though having no significant impact on the listed entity as such, will have to be placed before the board thereby creating an unnecessary compliance burden producing no meaningful results.

A possible leeway that may be created as a make-through to provide certain de minimis exemptions on the basis of certain amounts or percentages. For example, a listed company may approve through its board and audit committee, that any transaction undertaken by a subsidiary, which amounts to not greater than 2% of the turnover or the paid-up capital or the networth of the listed company, will not be required to be reported to the board of the listed company.

However, while putting such de minimis exemptions, utmost care has to be taken to ensure that the self-approved exemptions do not turn out to completely erode the intentions of the law. Further, the requisite approvals have to be obtained and properly documented so as to avoid falling into a legal moss at a later stage.


The requirement under Regulation 24(4) enhances corporate governance standards in subsidiaries which were otherwise unlisted and exempted from such scrutiny. It allows the listed holding company to exercise due diligence in significant transactions entered by subsidiaries. However, in certain cases, the requirement becomes redundant due to absence of any material effect of subsidiary’s transactions on the overall performance of the holding company due to minimal asset size or revenue. Therefore, the idea of exempting subsidiaries below a certain threshold in terms of asset size or revenue of the listed company can be thought upon.The market regulator may also take a step to bring this as an amendment to the law, so as to ensure reduction of extra-compliance burden as recently suggested by FM Nirmala Sitharaman in her speech on the 53rd Foundation day of ICSI.


Read our other article on the subject –

‘Material Subsidiary’ under LODR Regulations: Understanding the metrics of materiality:


Quarterly financial results for debt listed companies


The SEBI Circular dated 5th October, 2021 can be read here

The SEBI Circular dated 5th July, 2019 can be read here

The SEBI Circular dated 10th August, 2016 can be read here

Our article on the same can be accessed here – https://vinodkothari.com/2021/09/debt-listed-entities-under-new-requirement-of-quarterly-financial-results/

Immediate Actionables from the Quarter & Half Year ended September 30, 2021

Burhanuddin Dohadwala, Senior Manager | corplaw@vinodkothari.com     

Updated as on: October 06, 2021

SEBI recently notified several amendments that become effective on various dates.

In case of equity listed entities, SEBI vide Circular dated May 31, 2021[1] mandated disclosures around loans/ guarantees/comfort letters/ security provided by the listed entity, directly or indirectly to promoter/ promoter group entities or any other entity controlled by them, on a half yearly basis, in order to ensure greater transparency. The format has been prescribed as Annex IV to his requirement becomes effective from first half year of the FY 21-22. Accordingly, this will be required to be furnished for the first time while submitting the corporate governance report under Reg. 27 (2) of Listing Regulations for quarter and half year ended September 30, 2021.

Further, SEBI notified fifth amendment to the Listing Regulations[2] w.e.f. September 7, 2021 pursuant to which debt listed entities with outstanding principal amount of Rs. 500 crore and more as on March 31, 2021 were categorized as ‘High Value Debt Listed Entity’ and subjected to corporate governance requirement (Reg. 15 to 27 of Listing Regulations) on a ‘comply or explain basis’ till March 31, 2023.

In the aforementioned amendment, SEBI also amended compliance requirements applicable to all entities with listed non-convertible securities (i.e. NCDs, NCRPS)[3].

The table below provides immediate compliance requirement to be carried out post September 30, 2021 by an equity listed and non-convertible security listed entity.

Regulation No. Heading Particulars Timeline Due Date

Entities with listed specified securities

27(2) Corporate Governance Annex IV of SEBI Circular dated May 31, 2021 w.r.t Format of compliance report on Corporate Governance by Listed Entities Within 21 days on a half yearly basis

(commencing from September 30, 2021)

October 21, 2021

 High Value Debt Listed Entity (HVDLE)

27(2) Corporate Governance Annex I of SEBI Circular dated May 31, 2021 w.r.t Format of compliance report on Corporate Governance by Listed Entities

As per NSE & BSE Circular dated September 30 & October 01, 2021 respectively w.r.t Formats specifying disclosure of Corporate Governance by High value debt listed entities.

Within 21 days on a quarterly basis. October 21, 2021

 All entities with listed Non-Convertible Security 

52(1) Financial Results Listed entity shall prepare and submit un-audited/audited quarterly and year to year financial results to stock exchange.

Format: As per SEBI Circular dated October 05 w.r.t Revised Formats for filing Financial information for issuers of non-convertible securities.


Intimation to stock exchange within thirty minutes of the closure of the meeting where the financial results are placed.

Within 45 days of end of Quarter (except for last quarter)


November 14, 2021
52(7) A  statement  indicating  the  utilization  of  issue  proceeds  of  non-convertible securities The listed entity to submit to the stock  exchange,  a  statement  indicating  the  utilization  of  issue  proceeds  of  non-convertible securities, which shall be continued to be given till such time the issue proceeds have been fully utilised or the purpose for which these proceeds were raised has been achieved. Within forty-five days from the end of every quarter November 14, 2021
52(7A) Material Deviation In case of any material deviation in the use of proceeds as compared to the objects of the issue, the same shall be indicated in the format as specified by the Board i.e. Jan 17, 2020.
57(4) Details  for  interest/dividend/principal obligations shall be payable during the quarter The  listed  entity to provide  details  for  all  the  non-convertible  securities  for  which  interest/dividend/principal obligations shall be payable during the quarter. Within five working days prior to the beginning of the quarter. September 24, 2021 to September 30, 2021
57(5) Confirming the payment along with the details of unpaid interest/dividend/principal obligation The listed entity to provide the following:

  • a certificate confirming the payment of interest/dividend/principal obligations for non-convertible securities which were due in that quarter; and
  • the  details  of  all  unpaid  interest/dividend/principal  obligations  in  relation  to  non-convertible securities at the end of the quarter.
Within 7 working days from the end of the quarter. October 11, 2021
Proviso to Reg. 61A(2) Dealing with unclaimed non-convertible securities and benefits accrued thereon Transfer to escrow account of unclaimed interest/ dividend and redemption amount, w.r.t. non-convertible securities, as on September 7, 2021 that is outstanding for less than 7 years. Within 30 days from September 07, 2021 October 07, 2021
61A(2) Transfer to escrow account of unclaimed interest/ dividend and redemption amount, w.r.t. non-convertible securities, remaining unclaimed for thirty days after due date (‘X’). X+30 days+7 days


[1] Read our write up at https://vinodkothari.com/2021/06/financial-transactions-with-promoter-entities-become-part-of-cg-disclosure/  and ppt at https://vinodkothari.com/2021/06/presentation-on-lodr-amendments/

[2] Refer snapshot of amendment at https://vinodkothari.com/2021/09/presentation-on-lodr-fifth-amendment-regulations-2021/ and write up at https://vinodkothari.com/2021/09/corporate-governance-enforced-on-debt-listed-entities/

[3] Refer ppt at https://vinodkothari.com/2021/09/presentation-corporate-governance-debt-listed-entities/

Refer FAQs at https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/ ; https://vinodkothari.com/2021/09/faqs-corporate-governance-debt-listed-entities/

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:

SEBI approves stricter norms for RPTs

CS Vinita Nair | Vinod Kothari & Company

September 29, 2021

SEBI in its Board meeting held on September 28, 2021 approved the amendments in RPT framework that were proposed by the Working Group[1] (‘WG’) in January, 2020. The notification amending SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) is awaited. Certain amendments to come into force from April 1, 2023 and remaining from April 1, 2022. This write up discusses the key amendments approved by SEBI in the Board meeting held on September 28, 2021[2].

In view of the recent amendment made in Listing Regulations w.e.f. September 7, 2021 the framework for Related Party Transactions (‘RPTs’) is also applicable to a High Value Debt Listed Entity (‘HVDLE’)[3].

Read more

Presentation on Corporate Governance for Debt Listed Entities

Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:
  3. Ease of doing business: Debt listed companies slide down to unlisted companies – https://vinodkothari.com/2021/02/debt-listed-companies-slide-down-unlisted-companies/ 

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:

FAQs on LODR amendment on ‘High Value’ debt listed entities

Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:
  3. Ease of doing business: Debt listed companies slide down to unlisted companies – https://vinodkothari.com/2021/02/debt-listed-companies-slide-down-unlisted-companies/ 

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:

Debt listed entities under new requirement of quarterly financial results

-Implications and actionables

Last updated on 5th October, 2021

Anushka Vohra | Deputy Manager


The SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021[1] have increased the compliance burden on the debt listed entities. Ranging from introducing the corporate governance requirements on High Value Debt Listed Entities (HVDLEs)[2] to increasing the disclosure and compliance requirements on all debt listed entities, the amendment per se aims to make the current regulatory requirements stringent on the debt listed entities.


One significant amendment under Chapter V, which is applicable on all debt listed entities, is the requirement of submission of financial results on a quarterly basis instead of a half yearly basis, as was previously the requirement. With this write-up, we will try to understand the implications on the debt listed entities due to change in the periodicity of submission of financial results and the required actionables.


As per the amendment, the debt listed entities will be required to prepare the quarterly and annual financial results, as per the format specified by the Board. The Board has on October 05, 2021, specified the format[3] to be followed by the entities whose non-convertible securities are listed. Our snapshot on the same can be accessed here. It is pertinent to note that while the line items remain the same, the periodicity seems to be exactly similar to the erstwhile format which was applicable on entities that have listed their equity shares / specified securities.

A snapshot of the format is as under:

Since the time the amendment has been introduced, it was quite anticipated that the format would be similar to what was initially applicable to entities that have listed their equity shares / specified securities. The secretarial team of companies were struggling with the same, however the SEBI circular has put to rest the concerns and has, by way of a note clarified that, in case the debt listed entities do not have corresponding quarterly financial results for the four quarters ended September, 2020, December, 2020, March, 2021 and June, 2021, the column on corresponding figures for such quarters will not be applicable.

Entities with listed non-convertible securities

Consideration of financial results

Non-convertible securities include debentures which are not convertible into equity at any given time and constitute a debt obligation on the part of the issuer. Chapter V of the SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) is applicable to entities that have listed their non-convertible securities on the stock exchange(s). Regulation 52 of the Listing Regulations deals with the preparation and submission of financial results

The extant Regulation provided that such listed entity shall submit financial results on a half yearly basis, within 45 days from the end of half year i.e; within 45 days from the end of September & March [for entities following FY April-March]. For the first half year the requirement was mandatory but SEBI provided a relaxation for second half year, whereby it was stated that such listed entity may not be required to submit unaudited financial results for the second half year, if it intimates in advance to the stock exchange(s), that it shall submit its annual audited financial results within 60 days from the end of financial year. Akin to such relaxation, SEBI provided that if such a listed entity submits the unaudited financial results within 45 days from the end of the second half year, the annual financial results may be submitted as and when approved by the board of directors.

Extant framework

Unaudited accompanied with limited review report Audited financial results + statements + Auditor’s Report (AR)
For the first half year (have to be mandatorily given) For the second half year (whether submitted / not)
Yes No Within 60 days from end of financial year
Yes Yes As soon as approved by the board


Now, since the periodicity has changed from half yearly to quarterly, such listed entities will be required to submit financial results within 45 days from the end of each quarter, other than the last quarter and the annual financial results within 60 days from the end of the financial year.

New framework

Unaudited accompanied with limited review report Audited financial results + statements + AR
For the first quarter* For the second quarter* For the third quarter* For the fourth quarter**
Yes Yes Yes No Within 60 days from end of financial year

*mandatorily required

**not required


Landscape of intimations & disclosures – understanding the actionables

It is an irrefutable fact that debt in India is mostly privately placed which primarily involves the Qualified Institutional Buyers (QIBs) and no prejudice is caused to the public at large. Keeping that in mind, the debt listed entities were treated differently from the equity listed entities and were not subject to the such stricter compliances when compared to debt listed entities.

In view of  SEBI’s approach during recent times, , it has put an end to the easy going voyage of a debt listed entity and they have been placed at par with the equity listed entities.

Regulation 50 dealing with intimation to stock exchange(s) has been amended and now require the debt listed entities to intimate to the stock exchange(s) at least 2 working days in advance, excluding the date of board meeting and date of intimation, of the board meeting where the financial results shall be considered (quarterly / annually). This Regulation 50 corresponds to Regulation 29 which is applicable to equity listed entities.

Further, in case of equity listed entities, Regulation 30 (read with Schedule III Part A) is a cumbersome Regulation as the same requires certain events to be disclosed as and when they occur. For debt listed entities, the corresponding Regulation is Regulation 51 (read with Schedule III Part B). Unlike Regulation 30, the list under Regulation 51 (i.e; under schedule III) was narrow in its scope, however, with the said amendment, the list under the Part B of Schedule III, applicable on debt listed entities has also been amended to streamline the same with what is applicable on equity listed entities.

Furthermore, while submitting the financial results (quarterly / annually) under Regulation 52, the debt listed entities have to provide certain information. Such information is captured under Regulation 52(4) and includes the following:

Exemption : Non Banking Financial Companies (NBFCs) which are registered with the RBI were exempted from making disclosure of interest service coverage ratio, debt service coverage ratio and asset cover. However, exemption from disclosure of asset cover has been withdrawn i.e; now the NBFCs that have listed their debt securities have to make disclosure of asset cover. Also, the exemption from disclosing interest service coverage ratio and debt service coverage ratio is now also extended to Housing Finance Companies (HFCs) registered with the RBI.

This new framework is now in sync with what is applicable to equity listed entities. The Regulator’s intent to subsume the compliances applicable on equity and debt listed entities seems to have been inspired by the need for more transparency and promptness of information. However, this sudden drift calls for certain actionables on the part of debt listed entities.

A summary of actionables can be represented as under:


Other aspects :

Entities with listed equity shares / convertible securities

The entities that have listed their equity shares / convertible securities i.e; specified securities are covered under Chapter IV of the Listing Regulations, subject to exemptions under Regulation15. These entities have to comply with Regulation 33 for preparation and submission of financial results and the timeline for the same is quarterly. There has been no change for such listed entities as far as the financial results are concerned.

However, since the amendment has made Chapter IV applicable on HVDLEs which are debt listed entities covered under Chapter V, these HVDLEs have to comply with both Regulation 33 and Regulation 52. But since the requirements in both these regulations have been streamlined, no impact will be caused on such HVDLEs.

Entities with listed equity shares & non-convertible securities OR listed convertible securities & non-convertible securities

Such entities are governed by both Chapter IV and Chapter V, thus w.r.t. financial results they have to comply with both Regulation 33 and Regulation 52. Prior to such amendment, such listed entities followed the quarterly preparation and submission of financial results, since the same is stricter. For all other provisions which are common among both chapters but vary in timelines, the one with the stricter provision needs to be followed. For instance, in case of prior intimation of board meetings where financial results shall be considered, Chapter IV provides advance intimation of 5 days, whereas Chapter V provides advance intimation of 2 working days. Clearly, the timeline of 5 days in advance is stricter, therefore such entities shall comply with the same.

Concluding remarks

The sense of ease on the debt listed entities has been undone and the Regulator is preparing to bring the equity and debt listed entities under the same blanket. The extension of Chapter IV on HVDLEs seems to be a wake up call for debt listed entities which are not HVDLEs as of now. The enhanced disclosure on all debt listed entities would nevertheless burden them, however the impact of the same is yet to be analysed.

Our snippet on the same can be accessed at – https://vinodkothari.com/2021/10/quarterly-financial-results-for-debt-listed-companies/

Our other resources on related topics –

  1. https://vinodkothari.com/2021/09/high-value-debt-listed-entities-under-full-scale-corporate-governance-requirements/
  2. https://vinodkothari.com/2021/09/corporate-governance-enforced-on-debt-listed-entities/
  3. https://vinodkothari.com/2021/09/full-scale-corporate-governance-extended-to-debt-listed-companies/
  4. https://vinodkothari.com/2021/09/presentation-on-lodr-fifth-amendment-regulations-2021/

[1] https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html

[2] A listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs. 500 crore & above as on March 31, 2021.

[3] https://www.sebi.gov.in/legal/circulars/oct-2021/revised-formats-for-filing-financial-information-for-issuers-of-non-convertible-securities_53136.html


‘High value’ debt listed entities under full scale corporate governance requirements

SEBI move nullifies MCA exemption; bond issuers face disproportional compliances

Vinod Kothari & Vinita Nair  | Vinod Kothari & Company

Giving bond markets in the country a push is an admitted policy objective; so much so that “large borrowers” are mandated to move a part of their incremental funding compulsorily to the bond markets. Just when privately placed bond issuance was looking very promising, augured by low interest rates and  increasing investors’ confidence, SEBI’s recent move of notifying SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021 (‘2021 Amendment’)to extend corporate governance requirements, largely equivalent to that applicable to equity listed entities, comes as an enigma. These new norms, incorporated in the post-listing corporate governance requirements imbibed in SEBI ( Listing Obligations and Disclosure Requirements) Regulations, 2015  (‘Listing Regulations’) become effective immediately on a “comply or explain” basis, and become binding from 1st April, 2023.

What is surprising is that the capital market regulator has thought of equating a debt listed entity with an equity listed one; potentially disregarding the essential difference between equity listing and bond listing. Equity listing is achieved by a public offer, which underlies widely dispersed retail investors’ interest. Bond listing, to the extent of 98%, is by way of private placement, which definitely means that bonds are placed with knowledgeable qualified institutional buyers. Also, it is a known fact that a large number of listed bond issuers are private limited companies, which are close corporations, with strictly private holding of capital. In light of these facts, extension of substantially the same regime for debt listed entities as that applicable to equity listing creates several irreconcilable compliance requirements, some of which are detailed out in this article. At a time when the need to push the country’s bond markets to new heights, ahead of a potential inclusion of India in global bond indices, is unquestionable, this regulatory move is both surprising as prejudicial. Surprising, because many of SEBI’s regulatory exercises, there was no public comments for these amendments.

The key to the potential prejudice that the regulatory move may cause to bond markets is the definition of “high value debt listed entities”, picking up a threshold of Rs. 500 crores. If the total value of listed bonds outstanding, purely from the corporate sector, is over Rs. 36 lakh crores[1], the amount of Rs. 500 crores is infinitesimal, less than 0.014% of the bond market, and therefore, the basis for taking this value as “high value” is seriously flawed.

Let us start with some facts. India’s bond market is largely a private placement, comprised of bespoke bond issues with limited number investors, majority of them being Qualified Institutional Buyers (QIBs). While technically, these bonds may be sourced through an electronic platform, the avowed fact is that bond issues by even the most frequent bond issuers are negotiated over the counter. Public issue of bonds is activity rarity. This is evident from Table 1: Listed debt issuance, by way of private placement vis-à-vis public issuance during last 3 years.

Regulatory regime before:

Regulation is always proportional to the regulatory concern: the regulatory concern in this case, obviously, is investor protection. Securities regulator is neither the prudential regulator for the bond issuers, nor does it lay the operational safeguards in working of companies. The key objective of the securities regulator is to ensure that the corporate governance does not entail risks to investors’ interest.

Further, the regulatory regime that existed hitherto is as follows: Once the debt securities are listed, companies were required to comply with Listing Regulations mainly Chapter II (dealing with principles relating to disclosures), Chapter III (dealing with common obligations for all listed entities and Chapter V (dealing with disclosure requirements on website, to debenture trustees, stock exchanges, submission of financial results and structure and terms of debt securities). Provisions relating to corporate governance were not applicable to debt listed entities.

It is also notable that debt listed entities were earlier only required to prepare half yearly financial statements, as opposed to quarterly financial statements applicable to equity listed entities.

The rest of the labyrinth of corporate governance provisions, dealing with composition of board of directors, non-executive chairperson, independent directors, constitution of the several board committees, shareholders’ approval for  related party transactions, etc. were not applicable to debt listed entities.

Present amendment

SEBI, in its Board meeting held on August 06, 2021 approved amendments to the Listing Regulations and notified 2021 Amendment with effect from September 8, 2021[2]. The amendments may be classed into (i) those applicable to a “high value” debt listed entity and (ii) those applicable to every entity having its non-convertible securities listed[3].

The 2021 Amendment has made corporate governance related provisions applicable to a listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs. 500 crore and above as on March 31, 2021 (‘HVD entity’). Further, once the provisions become applicable, it will continue to apply even if subsequently the outstanding value falls below the threshold.

Given the details of bonds issuance and present outstanding indicated above, there would be several entities that would be regarded as an HVD entity. In view of SEBI’s requirements under Large Corporate Borrower framework, entities with any of its securities listed, having an  outstanding  long  term  borrowing  of  Rs.  100  crores  or  above and with credit rating of ‘AA and above’[4], will have to mandatorily raise 25% of its incremental borrowing by ways of issuance of debt securities or pay monetary penalty/fine of 0.2% of the shortfall in the borrowed amount at the end of second year of applicability[5].

If one were to argue it is the mere size of debt funding that brings in corporate governance requirements, then even a company that borrows from banks and financial institutions to the extent of Rs. 500 crores should, a priori, have been subjected to similar requirements. If moving from loans to bonds attracts severe corporate governance requirements, not applicable otherwise, there is a clear disincentive to moving bond markets, which is conflicting directly with SEBI’s own requirement of a “large borrower framework”.

We discuss some of the new requirements imposed on HVD entities, and demonstrate how some of these are completely non-reconciling with the type of entities to which they would apply.

Complete overhaul of Board composition

The Board of an HVD entity should comprise of prescribed number of independent directors (‘IDs’) depending on the nature of office of the Chairperson. Appointment of IDs in case of private companies and wholly owned public limited companies will require inducting requisite number of external persons on its Board. In case of a promoter Chairperson, half of its Board should comprise of IDs. A private company is a private matter, in terms of its shareholding. It cannot have an “independent” shareholder. Hence, boards of private companies, as per law, may only have 2 directors. SEBI, on the contrary, mandates 6 directors. Regrettably, the very “privacy” of a private company is compromised with the mandated presence of independent directors. Indeed, there are external investors who contributed to the debt of the entity, but they did with the explicit understanding that the corporate governance of a private company is remarkably different from that of a widely held company. If a private company has to behave and be governed almost like a widely held public company, then there may be a very strong disincentive for such companies to access bond markets.

The requirement of IDs is not merely getting some guests into the boardroom: IDs are required to be independent of management, should meet the eligibility criteria and are responsible to protect the interest of the minority shareholders. In case of several HVD entities there would be no minority shareholders whatsoever: therefore, the IDs would be left wondering as to how the IDs discharge the very same obligations as applicable to an entity with a few lakh shareholders.

The procedure to be followed by a listed entity for appointment of an ID under Listing Regulations is also very elaborate. The Nomination and Remuneration Committee (‘NRC’) is required to prepare a description of the needed capabilities and skill sets after doing a gap analysis, identify candidates basis the prepare description, justify to the Board and shareholders how the proposed incumbent meets the criteria and then recommend their appointment.

The listed entities are not only required to obtain declaration of independence from the IDs but also assess the veracity of the same. Further, the provisions stipulate conducting familiarization programme periodically, obtain Directors and Officer’s insurance for the IDs (otherwise applicable only to top 500 equity listed entities w.e.f. Jan 1, 2022), and ensure that a separate meeting of IDs are carried out.

Need to constitute 4 Committees

The HVD entity, irrespective whether a private company or a closely held company, is required to have an Audit Committee, NRC, Risk Management Committee (otherwise applicable only to top 1000 listed entities based on market capitalization,  but strangely applicable to the entire population of HVD entites) and even a Stakeholder’s Relationship Committee (‘SRC’).

Section 178 of CA, 2013 also mandates constituting SRC only where there are 1000 shareholders, debenture holders, deposit-holders and any other security holders at any time during a financial year. And there are quite a few debt listed entities that have not triggered this requirement even after 8 years of enforcement of CA, 2013.

Under Listing Regulations as well, the role of SRC is mainly to resolve investor grievances, oversee steps taken by the listed entity to reduce quantum of unclaimed dividend, effective exercise of voting rights, monitoring adherence to service standards by RTA, which may not be even relevant to HVD entities that are private companies or closely held public companies. Strangely, the requirement of having SRC will be applicable to debt listed entities having a handful of debt investors, and purely in-house shareholders.

Remuneration related approvals

Requirement to seek shareholder’s approval by way of special resolution is applicable in case of continuing with directorship of a non-executive director (‘NED’) of 75 years and above, or remunerating one NED to the extent of more than 50% of annual remuneration of all NEDs in a financial year, or paying of remuneration to the promoter directors serving in executive capacity in case (i) the annual remuneration payable to such executive director exceeds Rs. 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or (ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity.

And it will not be a case of wide shareholder participation with institutional shareholders exercising voting rights basis the guidance from proxy advisors etc. as several of HVD entities could be private companies or closely held public limited companies.

Further, prior approval of public shareholders is required in case any employee including key managerial personnel or director or promoter of a listed entity enters into any agreement for himself /herself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity.

Formulation of codes and policies

Code of conduct for Board and senior management personnel, policy for determination of material subsidiary, policy for determination of materiality of and dealing with related party transactions, archival policy for website are some of the additional codes and policies that HVD entities will have to frame.

Paradoxical regulation: Related Party Transactions (‘RPTs’) to require minority shareholder approvals

While framing a policy for determination of materiality of and dealing with RPTs and half yearly disclosure of RPTs to stock exchange might seem feasible, the 2021 Amendment also stipulates only IDs in the Audit Committee to approve RPTs. Further, in case of material RPTs, at the time of seeking shareholder’s approval all related parties are prohibited from voting to approve the RPT i.e. either they may vote against or abstain from voting altogether.

This is completely paradoxical. A debt listed entity may be a subsidiary of a holding company. The holding company, being a “related party”, will be excluded from voting. If the related parties are to be excluded from voting at the general meeting of a private company, it is quite likely that there will be no shareholders whose votes may be counted!


Subsidiary related governance

An HVD Entity will be required to ascertain material subsidiary, induct an ID on the board of super material subsidiary (that contribute 20% of consolidated income or net worth), place details of significant transactions undertaken by unlisted subsidiary before its Board, place the financials of unlisted subsidiaries before its Audit Committee and seek prior approval of shareholders in case of disposal of shares resulting in losing of control over the entity by the HVD entity or selling/leasing/ disposing 20% of the assets of such material subsidiary in a financial year.

Group governance may be more relevant for entities where the listed entity is answerable for creation of shareholder value. In case of a debt listed entity, the expectation of the investors is not creation of shareholder value but ability to timely service the debt and redeem the principal.


Will this be a deterrent for new issuers or small players from opting for the listed debenture route? Whether these enhanced corporate governance norms provide greater comfort and assurance to the investors in securing timely repayment of their monies? Will it increase trading in debt securities in the secondary market? It is assumed that SEBI must have considered these before enforcing the 2021 Amendment and only time could reveal the effectiveness of these provisions.






[1] The total corporate bond outstanding as on June, 2021[1] is about 36,27,667.18 crores represented by 26,350 outstanding instruments of 3903 issuers. The actual number of issuers, instruments and outstanding amount will be higher, if one were to include unlisted debt issuance as well.

[2] https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html

[3] As per SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 means debt securities, non-convertible redeemable preference shares, perpetual non-cumulative preference shares, perpetual debt instruments and any other securities as specified by the Board;

[4] As per para 2.2 of https://www.sebi.gov.in/legal/circulars/nov-2018/fund-raising-by-issuance-of-debt-securities-by-large-entities_41071.html

[5] a listed entity identified as a LC, as on last day of FY “T-1”, shall  have to  fulfil  the  requirement  of  incremental borrowing for FY “T”, over FY”T” and “T+1”.

Our other resources on related topics –

  1. https://vinodkothari.com/2021/09/high-value-debt-listed-entities-under-full-scale-corporate-governance-requirements/
  2. https://vinodkothari.com/2021/09/presentation-on-lodr-fifth-amendment-regulations-2021/
  3. https://vinodkothari.com/2021/09/debt-listed-entities-under-new-requirement-of-quarterly-financial-results/
  4. https://vinodkothari.com/2021/09/full-scale-corporate-governance-extended-to-debt-listed-companies/



Other write-up relating to corporate laws:


Our  our Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered though the below link: