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Tailored to Fit Practically: Disclosure for RPTs under Revised Industry Standards

FAQs on Standards for minimum information to be disclosed for RPT approval

Should you expect adjustment in profits for “Expected Credit Loss”?

– Customised profits for CSR and managerial remuneration under Section 198 of the CA, 2013

– Pammy Jaiswal and Sourish Kundu | corplaw@vinodkothari.com

Background

The presentation of the profit and loss account has been outlined under the Schedule III of the Companies Act, 2013  (‘Act’) and the profit computation method has been provided for under the applicable accounting standards [See IND AS 1]. The basic principle is to showcase a true and fair view of the financial position of a company. Having said that, it is also significant to mention that the Act provides for an alternative method for computing net profits, the basic intent of which is to arrive at an adjusted net profit which does not have elements of unrealised gains or losses, capital gains or losses and in fact any item which is extraordinary in its very nature. The same is contained under the provisions of section 198 of the Act. This section, unlike the general computation method, has a limited objective i.e., calculation of net profits for managerial remuneration as well as corporate social responsibility. 

There are four operating sub-sections under section 198 which provides for the adjustment items:

  1. Allowing the credit of certain items – usual income in the form of govt subsidies
  2. Disallowing the credit given to certain items – unrealised gains, capital profits, etc.
  3. Allowing the debit of certain items – usual working charges, interests, depreciation, etc
  4. Disallowing the debit of certain items – capital losses, unrealised losses, usual income tax, etc

It is important to note that items other than those mentioned above need not be specifically adjusted unless their nature calls for adjustment under the said section. Now if we discuss specifically for items in the nature of Expected Credit Loss (‘ECL’) for companies following IND AS, it is important to understand the nature of ECL in the context of making adjustments under section 198 of the Act. See our write on Expected Credit Losses on Loans: Guide for NBFCs.

Understanding ECL and Its Accounting Treatment

Reference shall be drawn from Ind AS 109 which defines ‘credit loss’ as ‘the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. cash shortfalls), including cash flows from the sale of collateral held.’ ECL is essentially a way of estimating future credit losses, even on loans that appear to be fully performing at the time of such analysis (Stage 1 assets). It is based on expected delays or defaults, and the estimated loss is recorded as a charge to the profit and loss account, based on a 12-month probability of default.

As per Ind AS 109, ECL is used for the recognition and measurement of impairment on financial assets both at the time of origination as well as at the end of every reporting period. ECL is a forward-looking approach that requires entities to recognize credit losses based on the probability  of future defaults/ delays.

However, this does not result in a reduction in the carrying value of the asset (unless the asset is already credit-impaired, i.e., Stage 3). In that sense, while ECL reflects asset impairment, it does not operate like a direct write-down. And unlike conventional provisioning, ECL is not a “provision” under traditional accounting – it is a loss allowance rooted in forward-looking estimations. Further, it is also important to understand that the booking of ECL does not mean that there has been a credit loss in the actual sense, the same is a methodical manner of estimating the probable default risk association with the asset value.

Treatment of ECL under Section 198 

Section 198 requires excluding unrealised or notional adjustments, such as fair value changes or revaluation impacts in terms of Section 198(3) of theAct.

The section also refers specifically to actual bad debts, under  Section 198(4)(o). This raises the natural interpretational question: should model-driven, probability-weighted ECL charges – which do not reflect realised losses – really be allowed to remain deducted while computing such customised profits? Well, the answer lies in the requirement and nature of such an item being required to be deducted from the profit and loss account under IND AS 109.  

Alternative approaches -Treatment of ECL

The question around the treatment of ECL can be viewed from two perspectives. The first being the nature of ECL and the second on the routine treatment and calculation of ECL. If we look at the nature, it is clear that while it is imperative for companies to compute ECL at the time of origination as well as at the end of every reporting period, it is important to note that there is no loss or default in the actual sense. This means that the amount computed as ECL has not been an actual default. 

On the other hand, if we look at the need for such computation and the methodical approach to arrive at the value of ECL, the same is likely to be considered as a usual working charge which is charged to the profit and loss account. Accordingly, we have come across two possible and permissible approaches to the treatment of ECL while computing the profits under section 198. The same has been discussed below with the help of illustrations.

Approach 1: Disallowing ECL in the year of its booking and subsequent adjustment of bad debt

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15
PBT – 1200
Depreciation – 20
ECL – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                  1000PBT                                                                                  1200
Depreciation                                                                     Depreciation                                                                    
Add: ECL                                                                            40Add: ECL                                                                            35
Add: Loss on sale of fixed asset                                    15Less: Profit on sale of equity shares                                                    (25)
PBT u/s 198                             1055PBT u/s 198                                  1210

Notes: 

  • ECL has been ignored in profit computation u/s 198 considering the same is an unrealised loss and therefore reversed.
  • Depreciation and actual bad debt has not been adjusted again as it has already been deducted under normal profit computation.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Approach 2: Allowing ECL in profit computation and netting off actual bad debt from the same in subsequent period

Year 1Year 2
PBT – 1000
Depreciation – 20
ECL – 40
Loss on sale of fixed asset – 15
PBT – 1200
Depreciation – 20
ECL recovered – 35
Actual Bad Debt – 15
Profit on sale of equity shares – 25
Year 1AmountYear 2Amount
PBT                                                                                 1000PBT                                                                                 1200
Depreciation                                                                    Depreciation                                                                     
ECL                                                                                     ECL                                                                                      
Add: Loss on sale of fixed asset                                   15Actual bad debt                                                                           
ECL recovered                                                                    
Less: Profit on sale of equity shares                          (25)
PBT u/s 198                            1015PBT u/s 198                           1185

Notes:

  • ECL has been considered in profit computation u/s 198  and therefore, not adjusted to reverse the impact
  • Similarly, ECL recovered has been considered part of normal or routine adjustment and hence, not reversed.
  • Actual bad debt is not to be considered at the time of profit computation under  the regular computation since it can be adjusted from the ECL already booked.
  • Capital gains and losses have been adjusted/ reversed under the computation.

Concluding remarks

All listed companies are required to comply with Ind AS and given that an instance of a company having nil receivables is a rare occurrence, the discussion on how ECL is to be treated while computing net profit in terms of Section 198 becomes more than just an academic debate.

As long as the impact of any P&L item being extra ordinary in nature is taken off from the profits computed u/s 198, the same serves the purpose and intent of section 198 of the Act. ECL, while valid for accounting, is fundamentally an estimated, non-actual loss. It exists because accounting standards demand alignment of income with credit risk  and not because a real outflow has occurred. However, it cannot be said that ECL already deducted while calculating profit before tax as per applicable accounting standards will be reversed while calculating profits in terms of Section 198. 

Further, given that ECL is based on expectation calculated using due accounting principles, the actual bed debt, if within the ECL limit, does not impact the P&L. On the contrary, in case of the actual bad debt being in excess, the P&L warrants a subsequent debit of the net amount. For example, under approach 2 if the actual bad debt would have been 50, i.e. in excess of the ECL booked in the previous period by 10, the normal profit computation would have allowed a debit of 10.

In fact, both the approaches lead to the fulfilment of the intent of section 198 and hence, it is not necessary to consider any one approach as correct. Having said that, it is imperative to follow uniform practice in this regard in the absence of which the profits u/s 198 may be impacted. 

Therefore, where the statutory and accounting frameworks intersect – but are not necessarily aligned – companies must adopt a carefully considered, principle-based approach as even a single line item like ECL can materially influence the base for managerial remuneration and CSR spending unlike other estimate based items such as revenue deferrals viz. sales returns or warranties, which are made as a matter of accounting prudence, but does not represent outflows for statutory computation purposes. Accordingly, there is no reason for deviating from the Indian GAAP principles for the purpose of customised calculation of net profits for specific purposes. 

Read more: 

Cash in Hand, But Still a Loss? 

Impact of restructuring on ECL computation

Knowledge Centre for Corporate Social Responsibility (CSR)

FAQs on Standards for minimum information to be disclosed for RPT approval

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SEBI approves a mix of reforms for regulated entities

– Easing ESOPs for IPO-bound companies, relaxations to SEBI regd. intermediaries, providing clarity for uniformity of practices  

– Team Corplaw | corplaw@vinodkothari.com

Various proposals have been approved by SEBI in its Board meeting dated June 18, 2025, pertaining to various relevant regulations. The approved changes may impact various market participants – listed entities as well as IPO-bound companies, SEBI registered intermediaries and regulated entities such as REITs, Invits, AIFs, FPIs, etc. We briefly discuss some of the important proposals as approved by SEBI. 

Relief for promoters in IPO-bound companies: easing rules on ESOPs and offer for sale 

  • Relaxation in eligibility norms with respect to Offer for Sale (OFS) in IPO (see Consultation Paper here)
    • Exemption from minimum holding period of 1 year extended to equity shares arising from conversion of Compulsory Convertible Securities (CCS), where such CCS were acquired pursuant to an approved scheme (earlier limited to equity shares) to assist in reverse flipping (i.e. shifting the country of incorporation from a foreign jurisdiction to India) [Reg 8 & 105 of ICDR Regulations].
  • Enabling Minimum Promoter Contribution (MPC) by Relevant Persons (apart from promoter) through equity shares arising from conversion of fully paid-up CCS  
    • Relevant Persons comprise of AIFs, FVCIs, Scheduled Commercial Banks, PFIs, insurance cos etc.
  • Founders-turned-promoters can retain share based benefits, ESOPs granted 1 year prior to filing of DRHP (see Consultation Paper here)
    • Brings relaxation for treatment of options granted prior to becoming a promoter, which was otherwise required to be liquidated

Dematerialisation of shares: pre-IPO and post-listing requirements 

  • Mandatory dematerialization of securities held by critical pre-IPO shareholders before filing of DRHP (see Consultation Paper here):
    • Following categories covered:
      • Promoter Group
      • KMPs
      • Directors
      • Employees
      • Selling Shareholders
      • QIBs
      • Senior Management
      • Financial sector entities 
    • To reduce volume of physical shares 
    • CA, 2013 also requires mandatory dematerialisation of holding of promoters, directors and KMP of companies prior to undertaking any share based corporate action [Rule 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules]
  • Corporate actions by listed entities in dematerialised form only
    • For shares to be issued pursuant to consolidation/split of face value of  securities  and  scheme  of  arrangements
      • CA, 2013 already requires companies to issue shares in dematerialised form only

Fund raising mandatory for social enterprises registered with SSE, relaxations in eligibility conditions for registration 

  • Mandatory fund raising through SSE 
    • Registration to lapse if social enterprise registered with SSE does not raise funds within 2 years from registration
  • Definition of “Not for Profit Organization” expanded [Reg 292A(e) of ICDR]
    • Trusts registered under Indian Registration Act, 1908 permitted (extant regulations refer to Indian Trusts Act, 1882 and a trust registered under the public trust statute of the relevant state) 
    • Charitable society registered under relevant state Act (extant regulations covered only society registered under the Societies Registration Act, 1860)
    • Companies registered under Section 25 of the erstwhile Companies Act, 1956 (clarity provided since extant regulation refers to section 8 of 2013 Act) 
  • List of eligible activities expanded to align with Schedule VII of the Act, 2013 (pertaining to CSR activities)
  • Criteria of 67% of total activities reflecting in eligible activities (through revenues, expenditure or total customer base) relaxed
    • To be applicable only to “for profit social enterprises” 
  • Annual disclosures bifurcated into financial and non-financial disclosures
    • Different timelines to be prescribed for such disclosures 
    • CP prescribes the extant 60 days’ period for non-financial disclosures, and upto 31st October after end of FY for financial disclosures 
  • Self-reporting of Annual Impact Report instead of certification from Social Impact Assessor
    • For social enterprise that has not raised funds through the SSE 
  • Change in nomenclature of “Social Impact Assessment Firm” to “Social Impact Assessment Organization”(SIAO) and eligibility conditions for the SIAO prescribed 
    • SIAO to is permitted to conduct social impact assessment provided they have at least two social impact assessors in full time employment 
    • Having an and such impact assessors have experience of at least 3 years of conducting social impact assessment.
    • Social impact assessor to sign the report if SIAO does not have 3 years’ track record 

Revamping of regulatory framework for Angel Funds under AIF Regulations 

[refer SEBI consultation paper dated November 13, 2024 and February 21, 2025]

  • Mandatory registration of Angel Investors as Accredited Investors(AI)  
    • Attracts independent verification of investor status
    • Grandfathering of earlier investments as non AI, and implementation through glide path 
  • Accredited Investors included as Qualified Institutional Buyer in ICDR for investments in Angel Funds.
  • Relaxation in investment norms by angel funds in investee company 
    • Floor and cap relaxed from Rs. 25 lacs to Rs. 10 lacs, and from Rs. 10 crores to Rs. 25 crores respectively 
    • Concentration limits of 25% per investee company removed.
    • Follow on investments permitted in investee company, though may no longer be start-up
  • Scheme may now have more than 200 AIs
  • Minimum continuing interest of Sponsor/ Manager at investment level instead of Fund level
    • higher of 0.5% of investment amount or Rs. 50,000
    • Earlier the commitment was required to be maintained at a fund level only

SEBI regulated entities enabled to carry out activities not regulated by SEBI

  • Merchant Bankers and Debenture Trustees have been permitted to carry out activities not regulated by SEBI within the same legal entity subject to following conditions:
    • DT may undertake activity within the purview of any other financial sector regulator (FSR), subject to compliance with the regulatory framework specified by such regulator 
    • For activities not within the purview of SEBI or other FSR, the same shall  be  fee-based and non-fund-based activity and pertain to FSR
      • Had been previously required to hive off such activities pursuant to SEBI Board Meeting decision in December, 2024
  • Custodians permitted to carry out other financial services under  the regulatory oversight  of  other  financial sector regulators within  the  same  legal  entity
  • subject  to  having  adequate  mechanisms  to  address  issues  of conflicts of interest
  • Non-bank associated custodians offering services which are not overseen by any financial sector regulator to : 
  • Disclose clearly that such activities are outside the purview of, and without  recourse  to  SEBI
  • Set up distinct strategic business units (SBUs) for undertaking activities not under the purview of SEBI with adequate mechanisms to address issues of conflicts of interest

Clarity of responsibilities and uniformity measures for DTs

  • Specifying rights of DT and corresponding obligations on issuer under LODR
    • To enable DT in enforcing its rights 
  • Enabling provisions for providing format for model debenture trust deed (DTD) [Refer Annexure-1 of Consultation paper dated Nov 04, 2024 for the model DTD as proposed by SEBI]  
  • Modification in manner of utilization of Recovery Expense Fund (REF) (see an article on REF here)
    • Elaboration of list of expenses for which REF can be utilised
    • To provide ease to DTs to take prompt action upon default by listed entity   

Relaxations in regulatory norms for REITs and InvITs [see consultation paper dated May 02, 2025]

  • Definition of ‘public’ under REITs / InvITs to be amended to include related  parties  of  the sponsor,  investment  manager/manager  and  project  manager to qualify as public if such related parties are Qualified Institutional Buyers
    • Relevant for determination of minimum public holding 
    • Related party of REIT/ InvIT viz. sponsor, sponsor group, investment manager, project manager are not regarded as ‘public’
  • Adjustment of negative net distributable cash flows generated by the Holdco against  cash received from the SPVs
    • Net cash flow post adjustment to be distributed to unitholders
  • Alignment of timelines of submission of various reports including quarterly reports, valuation reports with the timelines for submission of financial results.
  • Reduction of minimum allotment lot for privately placed InVITs to INR 25 lacs from INR 1 crore to align with the trading lot in secondary market.

Read more:

SEBI’s stringent norms for secured debentures

No shares, no say, yet a promoter: How marital ties create fictional “promoter groups”
Follow the SEBIscope channel on WhatsApp

Presentation on a Can of “Cannots”: Redefining Secretarial Audits

– Payal Agarwal, Partner | corplaw@vinodkothari.com

See our webinar on the same here: https://youtu.be/quOA5A9G0II

Secretarial auditors for listed entities: FAQs on disqualifications and prohibited services

FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations,2024

Misplaced exemptions in the RPT framework for HVDLEs

Nitu Poddar, Partner | corplaw@vinodkothari.com

After over two years of implementing CG norms for HVDLE on a ‘comply or explain’ basis, a new Chapter VA has been inserted in the LODR on March 28, 2025, governing CG norms for pure HVDLEs. Among other things, the new chapter outlines the requirements relating to board and committee composition, subsidiary governance, RPT framework for HVDLEs, etc.

As regards the RPT framework, the one for HVDLE (reg 62K) introduces an additional requirement: consent from debenture holders through NOC from the debenture trustees. 

This criteria has been added to fix the “impossibility of compliance” (of getting approval from unrelated shareholders for material RPTs) in case of HVDLEs as most of these have either nil or negligible unrelated shareholders. This also underscores the requirement to protect the interest of the lenders, particularly the debenture holders – aligned with s. 186(5) of the Companies Act, 2013. 

However,  there are a few practical implementation issues and inconsistencies, possibly arising from the CG norms (prior to the LODR 3rd Amendment in 2024) for an equity listed entity (chapter IV) being the drafting template for this new chapter. This article highlights these issues, particularly those affecting 62K, given the structure of HVDLEs.

Structural difference between HVDLE and an equity listed company

Before beginning to list such inconsistencies, it is important to highlight the structural difference between an HVDLE and an equity listed company –  the very reason why a separate chapter for CG has been rolled out for an HVDLE! 

HVDLEs are mostly closely held companies with all or close to all shareholders being related parties, approval from unrelated shareholders often becomes an impossibility. Further, considering that the funding to HVDLEs is by the debenture holders, protection of their interest becomes paramount. Accordingly, approval from the debenture holders have been made mandatory for undertaking any material RPTs by a HVDLE. 

13.3.3  Since, both banks and debenture holders are lenders to the borrowing entity, it is felt that a similar approach should be adopted for debenture holders. This  provides  a  layer  of  protection  to  the  debenture  holders who might be at risk of unfair treatment due to some RPTs which may also have an impact on the repayment capability of an entity. It is noted that the debenture holders’ interest is intended to be safeguarded by a debenture trustee [SEBI Consultation Paper date October 31, 2024] 

Present exemptions  – some extra; some missing

Lets now discuss the inconsistencies that needs to be fixed:

  • Grant of exemptions w.r.t transaction between holding company and its wholly-owned subsidiaries and among WOS does not place well with HVDLEs. 

The shareholders of the holding and its WOS are effectively the same and any benefit / resources, if at all transferred to the WOS, in case of an RPT between a holding and WOS, is to consolidate in the holding company and remain within the enterprise. Therefore, such transactions are exempted u/r 23(5). But this theory holds correct in case of an equity listed company only where the interest of equity shareholders needs to be protected. 

However, in a debt-listed structure, the concern shifts from the ‘enterprise’ to the individual ‘entity’. The exposure of debenture holders is required to be protected.  A debenture holder may have exposure only to the WOS, not the holding company. In such case, exempting RPTs between the holding company and its WOS (or between two WOS) overlooks the distinct legal and financial obligations of each entity. The interest of debenture holder can be considered only by seeking “their” approval for a RPT. The relationship of holding company and WOS between the transacting company does not ensure any protection to the debenture holders. The exemption in 62K(7), mirroring 23(5), places debenture holders at the mercy of equity shareholders in the holding company – contradicting the spirit of the rest of Regulation 62K, which otherwise mandates their approval.

Think of a situation where a WOS (which has issued the debentures) upstreams value to its parent. While equity shareholders in the parent may remain unaffected, the WOS may be left with insufficient resources to repay its debenture obligations. Debenture holders cannot claim recourse against the parent; their exposure is limited to the WOS.

  • Exemptions in reg 23 brought through LODR 3rd amendment viz. w.r.t remuneration to KMPs and SMPs who are not promoters etc is missing in Reg 62K

Remuneration paid to KMP and SMP who are not promoters, payment of statutory dues, transactions between PSU and CG / SG which are exempted for an equity listed entity have not been replicated under 62K. There is no reason why these exemptions which are provided to an equity listed entity, shall not be provided to an HVDLE, when the underlying intent of these exemptions aligns with an HVDLE. 

Our related resources on the topic:

  1. SEBI strictens RPT approval regime, ease certain CG norms for HVDLEs
  2. Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime
  3. Corporate governance norms for HVDLEs

RPTs: Wholly-owned but not wholly- exempt

– Application of RPT controls for transactions with Wholly owned Subsidiaries

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Enterprise Level v/s Entity Level: Paradox of a Wholly owned Subsidiary 

Wholly owned Subsidiaries (WoS) form a particular paradox in corporate laws with two contradictory positions – (a) the transactions entered into between the holding company and its WoS are viewed as transactions within a group, thus, permitting a seamless flow of resources between the two without any objection, looking at an “enterprise” level whereas, (b) limiting the access of the shareholders and creditors of the holding company and the WoS to the respective entity’s resources, thereby separation of the two at an “entity” level. 

Disregarding ‘entity’ concept over ‘enterprise’ concept: exemptions w.r.t. WoS 

Section 185 of CA 2013 exempts any financial assistance to the WoS from the compliance requirements under the section, and the limits on loans, guarantees, investments or provision of security under section 186 do not apply for transactions with WoS. Section 177(4)(iv) and 188 of CA 2013, pertaining to RPT controls, also extend certain exemptions for transactions with WoS. Reg 23(5) of SEBI LODR also exempts transactions with WoS as well as between two WoS from approval requirements, at both the Audit Committee and shareholders’ level. Reg 37A of SEBI LODR contains an exemption from shareholders’ approval requirements for sale, lease or disposal of an undertaking to the WoS. In each of the aforesaid provisions, the underlying presumption remains the same – the accounts of the WoS are consolidated with that of the holding company, and hence, the flow of resources remain within the same ‘enterprise’, despite change of ‘entity’. Thus the law takes an ‘enterprise’ wide view instead of an ‘entity’ level view while providing for such exemptions. 

Factors reinforcing the concept of separation of entity

On the other hand, the outreach of shareholders of a company is limited at an ‘entity’ level, that is to say, the shareholders of the holding company do not have access to the general meetings of the WoS. Similarly, the creditors of each entity do not have any recourse against the other entity. For instance, where the holding company has outstanding dues, but there are resources at the WoS level, can the creditors reach to the assets of the WoS? The answer is no. Similarly, a vice versa situation is also not possible. In fact, under the Insolvency and Bankruptcy Code too, the assets of the subsidiary are kept outside the purview of the liquidation estate of the holding corporate debtor [Section 36(4)(d)]. 

Further, the board of a WoS is different from its holding company. The board of the holding company does not have any rights over the board of the subsidiary. Therefore, under these situations, transactions between the holding company and its WoS, though between companies that are 100% belonging to the same group, cannot be viewed as completely seamless or free from any corporate governance concerns.   

RPTs between holding company and WoS: can the ‘enterprise’ approach be taken?

The aforesaid discussion makes it clear that while an ‘enterprise’ wide approach is taken in granting exemptions to WoS, the separation of legal entities cannot be completely disregarded, because the outreach of the shareholders, creditors and the board of directors remain limited. Now from the point of view of related party transactions, can it be argued that the transactions between a holding company and WoS are without any restraint altogether? For example, does the concept of arm’s length has no relevance in case of a transaction between a holding company and WoS? 

Concept of arm’s length and relevance in transactions with WoS

A light touch regulation or inapplicability of certain controls or approvals does not mean that arm’s length precondition becomes unnecessary. If such a view is taken, then the flow of resources between the holding company and the WoS will be completely without any fetters, thus breaching the concept of corporate governance at an entity level. For instance, can the board of directors of the holding company be absolved from its responsibilities to safeguard the assets of the holding company where the same flows to the subsidiary without any consideration? The answer surely is a no. Both ‘entity’ level and ‘enterprise’ level are significant, and hence, one cannot disregard the separation of legal entities, particularly, in the context of protection of assets of the entity (also see discussion under Role of Board below). 

As regards the concept of arm’s length, the same is omnipresent – required to be ensured in transactions with related parties as well as unrelated entities. The meaning of arm’s length transaction, as defined under SA 550 pertaining to Related Parties, is as follows:

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

Therefore, ‘independence’ and ‘own interests’ are important elements of an arm’s length transaction. If compromised in RPTs with WoS, absence of arm’s length criteria could lead to uncontrolled flow of wealth from the holding company to WoS, and may also lead to abusive RPTs. 

Are WoS structures immune from abuse?: Deploying WoS as a stop-over for abusive RPTs 

The exemptions w.r.t. transactions with WoS make the same prone to misuse, through use of the WoS as a conduit or a stop-over for giving effect to arrangements with non-exempt RPs. For instance, a listed entity in the FMCG sector is required to provide financial assistance to its upstream entities (promoter group entities). There may be a lack of business rationale and commercial justification for such a transaction, and therefore, it is highly unlikely that such a transaction would get the approval of the AC. Therefore, in order to give effect to the transaction, the company may route the same through its WoS, and thus escape RPT controls at its AC level. The WoS may, in turn, pass on the benefit to the promoter group entities, through a series of transactions, in order to cover the real character of the transaction (see figure below).  

A guidance note published by NFRA also, requires identification of indirect transactions, including through ‘connected parties’. In order to ensure no such indirect transactions have occurred, the management is expected to establish procedures to identify such transactions, and to obtain periodic confirmations from the directors, promoter group, large shareholders and other related parties that there are no transactions that have been undertaken indirectly with the listed company or its subsidiaries or its related parties.

Role of board

The role of the board towards avoiding conflicts of interests is deep-rooted under the corporate laws and securities laws, under various applicable provisions. For instance, the directors have a responsibility towards safeguarding the assets of the company and for preventing and detecting fraud and other irregularities [Section 134(5)(c) of CA 2013]. Section 166 of CA 2013 specifies the duties of directors. These include, among others, the duty to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company [Section 166(2)]. 

The key functions of the board, as contemplated under Reg 4 of LODR, also includes monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions. 

Scope of Exemption under Applicable Laws

As stated above, Reg 23(5) of SEBI LODR exempts RPTs entered into between a holding company and its WoS from the approval requirements of both the AC and the shareholders. 

Apart from Reg 23 of LODR, the RPT provisions are contained under Section 177 and 188 of CA 2013. Under section 177(4)(iv) of CA 2013, all RPTs require approval of the AC. The fourth proviso to the said sub-section exempts RPTs entered into with WoS from AC approval requirements. However, the said exemption is not absolute. The proviso reads as follows: 

Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.

Thus, the exemption for RPTs with WoS does not apply in case of a transaction referred u/s 188 of CA 2013. In other words, where an RPT with WoS triggers approval requirements u/s 188, the same will also be required to be approved by the AC u/s 177 first. 

Meaning of “a transaction referred to in section 188”

Section 188(1) of CA 2013 provides a list of 7 types of transactions. The list is wide enough to cover almost all types of transactions, except financial assistance in the form of loans etc. However, section 188 becomes applicable, only, in cases where any one or more of the two most crucial elements of a transaction are missing – (i) ordinary course of business and (ii) arm’s length terms. In cases where a transaction does not meet the ordinary course of business or the arm’s length criteria, the same is referred to the board of directors u/s 188 of CA 2013, and requires prior approval of the board. 

The fifth proviso to section 188(1) also contains an exemption for RPTs between the holding company and its WoS. Note that the said exemption is applicable only with respect to the approval of the shareholders, the approval of board is still required for RPTs that lack one of the two elements stated above, even though with WoS.

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:

XXX

Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval:

The conditional exemption given u/s 177 and the absence of any exemption from board’s approval u/s 188 clearly confirms the requirement of ensuring arm’s length terms in transactions with WoS. 

Expectations from AC 

The AC is the primary decision-making authority in respect of matters relating to related party transactions. NFRA, the audit regulator of the country, has published the Audit Committee – Auditor Interactions Series 3 dealing with audit of Related Parties. The guidance sets out potential points on which the AC may interact with the auditors in the context of RPTs. Where a company avails exemptions w.r.t. AC and shareholders’ approval, the guidance note requires documentation of the rationale for not obtaining Audit Committee’s and Shareholders’ approvals. 

Thus, the AC is expected to be the scrutinising authority in ensuring that the terms on which a transaction is proposed to be entered into with a WoS are at an arm’s length, which, in turn, would require bringing the transaction before the AC, if not for approval, then for a pre-transaction scrutiny and information. 

Disclosures in financial statements 

Ind AS 24 pertaining to Related Party Disclosures require disclosures  to be made in the financial statements that the RPTs were made on terms equivalent to those that prevail in arm’s length transactions. However, such disclosure can be made only if such terms can be substantiated. Note that the Ind AS 24 does not contain any exemption for WoS. In the absence of a strict scrutiny of RPTs with WoS for satisfaction of arm’s length basis of the terms of the transaction, such an assertive statement in the financial statements for arm’s length of the terms is not possible.  

Dealings with WoS: the suggested approach

In view of the expectations from the AC, board and the auditors, and the potential risks of abusive RPTs using WoS as an intermediary, the following approach may be undertaken before entering into a transaction with WoS: 

  • A pre-transaction scrutiny may be conducted by the AC for RPTs to be entered into between the holding company and its WoS. This should include all the necessary details as may be required by the AC, such as, nature of transaction, terms of the transaction, total expected value of the transaction etc. 
  • Based on such scrutiny, the AC may give its comments or recommendations where the same has any concerns. Necessary modifications may be carried out to address the comments of the AC, in order to make the transaction commercially viable for the holding company. 
  • Where the proposed transaction is not in (a) ordinary course of business or (b) not at an arm’s length basis, the same will require approval of the AC. The AC will refer the transactions to the board for approval u/s 188. 
  • Every RPT entered into between the holding company and its WoS should, as a part of the quarterly review, be reported back to the AC. Any alteration in terms or value of the transactions should be brought to the notice of the AC. 
  • As required under Reg 23(9) of the LODR, the transactions with WoS to be reported to the SEs on a half-yearly basis. 

Read more:

Related Party Transactions- Resource Centre

Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime

FAQs on Standards for minimum information to be disclosed for RPT approval

NAME THEM ALL: SEBI reiterates mandatory disclosure of all promoter group entities in shareholding pattern, regardless of shareholding

Lavanya Tandon, Senior Executive | corplaw@vinodkothari.com

Through the updated SEBI FAQs on LODR Regulations rolled out on April 23, 2025, SEBI has yet again clarified that  listed entities are required to disclose the names of all entities forming part of promoter / promoter group (P/PG), irrespective of any shareholding in the listed entity in the quarterly reporting of shareholding pattern to the stock exchanges. (FAQ no. 19 of section II)

Regulation 31(4) of LODR (inserted  via SEBI (LODR) (Sixth Amendment) Regulations, 2018) clearly mandates all entities falling under promoter and promoter group to be disclosed separately in the shareholding pattern. However, inspite of this clear mandate, as a matter of practice, India Inc seemingly has decided to disclose names of only such PGs who have shareholding in the company. With this reiteration of regulators expectation in its FAQ, this is the sign for the listed entities to buckle up and collate the entire list of PGs, irrespective of shareholding, for disclosure in the shareholding pattern (next disclosure due in June, 2025) 

It should be noted that a complete list of P/PG complements the listing of related parties as one of the elements of the definition of related party is “any person or entity forming a part of the promoter or promoter group of the listed entity”.

SEBI’s persistence requiring disclosure of complete list of PG

Since the longest time now (first through reg 31A and then through reg 31(4) among others), SEBI has been stressing in every way the requirement of disclosing the complete list of PG, irrespective of their shareholding.  Below are the instances where SEBI has identified the practice / clarified its position, over and over again. 

  1. Consultative Paper on re-classification of P/PG entities and disclosure of promoter group entities in the shareholding pattern dated Nov 23, 2020 

While Reg 31 of SEBI (LODR) Regulations, 2015 mandates that all entities falling under promoter and promoter group shall be disclosed separately in the  shareholding  pattern,  there  have  been  cases  where listed companies have not been disclosing names of persons in promoter(s)/ promoter group who hold ‘Nil’ shareholding. There is therefore a need for further clarification in this regard to the listed companies

  1. NSE FAQs on Disclosure of holding of specified securities and Holding of specified securities in dematerialized form dated Dec 14, 2022

Q6. Can the name of the promoter be removed from the Shareholding Pattern during the Quarter in case the Shares are transferred/sold? 

The name of the promoter can be removed only after seeking approval of Reclassification from the Exchange. Meanwhile Companies are requested to show the promoters/promoter group with nil shareholding till the approval for Reclassification is granted from Exchange. 

  1. SEBI Circular on disclosure of holding of specified securities in dematerialized form dated March 20, 2025 

Table II of the shareholding pattern has been amended as under: i. A  footnote  has  been  added  to  the table II that provides  the  details  of  promoter  and promoter group with shareholding “NIL”

Getting re-classified to stop disclosure – the only way

In the matter of Jagjanani Textiles Limited, upon transferring the entire shareholding, the name of a PG entity was not disclosed in the P/PG category; rather disclosed in the public category. SEBI observed this as a violation of Reg 31(4).  [See para 12 of the Order]

“12. It is observed that the promoter group entities of Noticee 1 i.e. Noticee 5 and 3 had acquired 2,94,000 shares and 5,51,424 shares during the quarter ended March 2013 and March 2014 respectively and since then both the Noticee 5 and 3 had been the shareholders of the Noticee 1 till the date of filing of DLoF i.e. April 10, 2023 except during the quarter ended September 2014 to June 2015 w.r.t the Noticee 5 where she ceased to be the shareholder. In this regard, it is observed that in terms of Regulation 31(4) of LODR Regulations, all entities falling under promoter and promoter group are required to be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entities are listed, in accordance with the formats specified by the Board. It is therefore alleged that both the Noticee 5 and 3 had been wrongly disclosed as Public shareholder during the aforesaid period. Further, it is observed that the Noticee 1 had confirmed to rectify the error in the shareholding pattern filed for the quarter ended June 30, 2023”

Where an entity not holding any shares in the listed entity wants to stop disclosing its name in the shareholding pattern – the only way is to apply for reclassification u/r 31A and get such approval from the stock exchange. Until such approval is obtained, one needs to disclose its name in the P/PG category.  

Our related resources on the topic

  1. SEBI clarifies on critical matters arising from LODR 3rd Amendments & Master Circular
  2. SEBI revisits the concept of Promoter and Promoter Group
  3. Making one’s way out – Promoter & Promoter Group
  4. Classification out of promoter category under Listing Regulations

 

SEBI clarifies on critical matters arising from LODR 3rd Amendments and Master Circular

Team Corplaw | corplaw@vinodkothari.com

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Representation to SEBI on SEBI (LODR) (Amendment) Regulations, 2025

– Team Corplaw | corplaw@vinodkothari.com

Read more at:

  1. Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime
  2. Presentation on CG Norms for HVDLEs
  3. SEBI strictens RPT approval regime, ease certain CG norms for HVDLEs