From Capital Assets to Stock-in-Trade: Taxing “Notional” Gains in Amalgamations

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Decoding Supreme Court ruling in Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi

– Sourish Kundu | corplaw@vinodkothari.com

One of the most common modes of corporate restructuring is merger, and one of the most crucial aspects in assessing the commercial viability of a proposed merger is its tax implications. Typically, in a merger, the shareholders of the transferor company are issued shares of the transferee company in order to avail the exemption under section 70(1)(f) of the IT Act, 2025 [corresponding to section 47(vii) of the IT Act, 1961]. The said provision grants exemption in case of scheme of amalgamation in respect of the transfer of a capital asset, being shares held by a shareholder in the transferor company, where (i) the transfer is made in consideration of the allotment of shares in the transferee company (other than where the shareholder itself is the transferee company) and (ii) the amalgamated company is an Indian company.

However, a recent Supreme Court ruling in the matter of Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi [2026 INSC 46] has opened a new avenue for debate w.r.t the taxation on receipt of shares of the transferee company in a scheme of amalgamation. In this case, the Supreme Court ruled that the exemption as provided under section 47(vii) of the IT Act, 1961 [corresponding to section 70(1)(f) of the IT Act, 2025] shall not be available to shareholders of the transferor company who are not perceived as “investors”, that is to say long term investors as opposed to traders, in the transferor company. And accordingly, any notional gain in a share swap deal pursuant to an amalgamation shall be taxed u/2 28 of the IT Act, 1961 [corresponding to section 26 of the IT Act, 2025].

In this article, we decode the nuances of the ruling, the impact it is expected to have in the sphere of merger deals and other related concerns.

Difference between capital and business assets

So far, the common understanding of consideration in case of amalgamations was that an amalgamation is merely a statutory replacement of one scrip for another, with no real “transfer” or “income” until the new shares are actually sold for cash, or in other words, mere substitution of shares in the books of the involved entities. However, the Apex Court in the instant judgement has now effectively set a different precedent for those holding shares as stock-in-trade, i.e. current investments.

The Court clarified that while Section 47(vii) provides a safe harbor for investors (treating mergers as tax-neutral corporate restructuring), this exemption does not extend to “business assets”, a.k.a. stock in trade. For a trader and investment houses, shares held in stock-in-trade represent “circulating capital”, and the objective of holding them is not capital appreciation, but conversion into money in the ordinary course of business. Therefore, replacing shares of an amalgamating company with those of an amalgamated company of a higher, ascertainable value constitutes a “commercial realisation in kind”.

The 3 pillar test for taxability

The SC applying the doctrine of real income emphasised in Commissioner of Income-Tax v. Excel Industries Ltd. and Anr. [(2013) 358 ITR 295 (SC)], established a three-pillar test, which is to be applied on a case to case basis to determine if allotment of shares pursuant to a merger triggers taxation of business income u/s 28 of the IT Act, 1961: 

  1. Cessation of the Old Asset: The original shares must be extinguished in the books of the assessee.
  2. Definite Valuation: The new shares must have an ascertainable market value.
  3. Present Realisability: The shareholder must be in a position to immediately dispose of the shares and realise money.

This test was further elaborated by two situations viz. allotted shares being subject to a statutory lock-in, which hinders the disposability of the asset, and allotted shares being unlisted, which cannot be said to be realisable, since no open market exists to ascribe a fair disposal value.

Additionally, the SC also held that the trigger is the date of allotment of the shares of the amalgamated entity, and neither the “appointed date” nor the “date of court sanction” or what is called as “effective date” in the general parlance, as no tradable asset exists in the shareholder’s hands until the scrips are actually issued.

Critical Concerns

While the ruling provides reasonable clarity on the treatment of shares received as a result of amalgamation, when the same is held in inventory, it leaves several operational questions unanswered, leaving a gap to determine the commercial feasibility of these deals.

  1. Treatment of profits and losses alike

If the Revenue can tax “notional” gains arising from a higher market value at allotment, correspondingly assessees should be allowed to book notional losses, if any on such deals as well. In cases where a merger swap ratio or a market dip results in the new shares being worth less than the cost of the original holding, the taxpayer should, by the same logic, be entitled to claim a business loss u/s 28 of the IT Act, 1961, or in other words, if the substitution is a “realisation” for profit, it must be a “realisation” for loss as well.

  1. Increase in cost of acquisition

A major concern is the potential for double taxation. If the assessee is taxed on notional gain, being the difference between the cost of acquisition of the original shares and the FMV of the shares of the transferee company on the date of allotment, such FMV should logically become the new cost of acquisition. If an assessee is taxed on the difference between the book value and the FMV at the time of allotment, but the increased cost of acquisition is not allowed, the same appreciation gets taxed twice. It is first taxed as business income at the time of allotment and again at the time of the actual sale.  

  1. Determination of the nature of shares as “stock in trade” vs “capital asset”

This issue remains prone to litigation, that is, who determines the nature of the investment, whether it is current or non-current? Will it be determined basis the books of account of the investor? 

A CBDT circular lays down certain principles along with some case laws to distinguish between shares held as stock-in-trade and shares held as investments, and decide the treatment of shares held by the investing company. Further, factors such as intention of the party purchasing the shares, [discussed by Lord Reid in J. Harrison (Watford) Ltd. v. Griffiths (H.M. Inspector of Taxes); (1962) 40 TC 281 (HL)], and method of recording the investments [highlighted in CIT v. Associated Industrial Development Co (P) Ltd (AIR1972SC445)], are considered as the deciding factors for making a demarcation between treating an asset as capital asset or stock-in-trade.

As highlighted in the instant case, while the initial classification is made by the companies in the financial statements, the AO is empowered to overlook the same, and determine whether the shares were held as stock-in-trade or as capital assets, as without that determination, the taxability or eligibility for exemption u/s 47 could not be ascertained.

It should be noted that the line between a long-term strategic investment and a trading asset is often thin, and the Jindal ruling places the burden on the Revenue to prove the stock status and the “present realisability” of the shares.

Conclusion

Proving by contradiction, the Apex Court has added that: “If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion. Enterprises could create shell entities, warehouse trading stock or unrealised profits therein, and then amalgamate so as to convert them into new shares without ever subjecting the commercial gain to tax. Equally, losses could be engineered and shifted across entities to depress taxable income. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus; to exempt them from charge at the point of substitution would undermine the integrity of the tax base”

Discussing the concept of “transfer”, “exchange” and “realisability”, the SC has affirmed that mergers do not entail a mere replacement of shares of one company with that of another, as for persons holding the same as stock-in-trade cannot be said to be a continue their investment, instead the new shares being capable of commercial realisation gives rise to taxable business income. The Jindal Equipment ruling seems to effectively end the assumption of automatic tax neutrality for all merger participants, subject to fulfillment of applicable conditions prescribed in the IT Act. As a result, if the tax officers believe that the shareholders hold the shares as stock in trade, and could cash out the same at the next possible instance, the assessee shall be under the obligation to pay tax even without encashing any gain in actuals. Further, the tax implications in such cases shall not be at the special rates prescribed for capital gains.

Read more:

Understanding “Undertaking” in the Context of Investment Demergers

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

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Related Party Lending: RBI rules for foreign banks

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– Aparajita Das, Executive | corplaw@vinodkothari.com

The recently issued RBI (Commercial Banks – Credit Risk Management) Amendment Directions, 2026 has revised and consolidated the regulatory framework governing lending to related parties. The revised framework strengthens governance standards, expands the scope of “related parties”, and introduces enhanced approval, monitoring, and disclosure requirements. The amendments have been discussed briefly in our article here (for commercial banks) and here (for NBFCs). 

Section 20 of the Banking Regulation Act, 1949 places a statutory prohibition on lending to directors and entities in which directors are interested, to prevent conflict of interest, self-dealing, and misuse of depositor funds. Pursuant to clause (a) of Explanation to sub-section (4) thereof, Para 15A has been issued under the CRM Directions to clarify how these restrictions apply in the context of foreign banks operating in India through branches. Prior to the Amendment Directions, the same was specified in Para 15(2) of the erstwhile CRM Directions. 

The RBI has clarified that foreign banks cannot circumvent Section 20 merely because the Board is located outside India. The regulatory intent is to ensure functional and ethical parity between Indian banks and foreign bank branches operating in India, particularly in relation to related party exposure.

Applicability of Restrictions to Foreign Bank Branches, Officers, Boards and Foreign / Indian Entities 

 1.  Regulatory Background 

Related party lending by banks in India is primarily governed by section 20 of the Banking Regulation Act, 1949. 

Section 20(1) of the Act imposes statutory prohibition on banks from granting loans or advances to:

  1.  any of its directors;
  2. any firm in which a director is interested as partner, manager, employee or guarantor;
  3. any company (other than permitted exceptions) in which a director holds substantial interest or is interested as director, managing agent, manager, employee or guarantor; and
  4. any individual in respect of whom a director is a partner or guarantor.

The said provisions are mandatory and prohibitory in nature and are intended to prevent conflicts of interest and misuse of fiduciary position.

2. Applicability to Foreign Banks in India – Para 15A(1) of CRM Directions 

Para 15A, issued in pursuance of clause (a) of the Explanation to Section 20(4) of the BR Act, provides that the sanction or grant of credit facilities to companies in India by a foreign bank having branches in India shall be in compliance with the spirit of Section 20 of the Banking Regulation Act, 1949.

Accordingly, an Indian branch of a foreign bank shall not lend to any firm or company in India if: 

  1. A Director on the Board of the foreign bank abroad has an interest in such firm or company;or
  2. The company is a subsidiary of an Indian or foreign parent entity in which such Director is interested.

RBI in its direction has explicitly stated –

  1. That a Director sitting on the foreign bank’s Board outside India is treated at par with a director of an Indian bank, for the purposes of Section 20.
  2. That the location of the Board (abroad) or the incorporation of the bank outside India does not dilute the applicability of lending restrictions.

Therefore, Indian branches cannot claim regulatory insulation by arguing that the Director is not involved in Indian operations.

3. Exceptions and Permissible Transactions

The Directions provide limited and narrowly construed exceptions which includes:

  1. Credit facilities granted prior to appointment of the Director, subject to no renewal, modification or enhancement till the conflict ceases;
  2. Loan against own deposits, government securities or life insurance policies within the prescribed loans to value norms.
  3. Personal loans to Directors provided to other employees as a part of the Policy or forming part of approved compensation  package of such director.
  4. Advances to public trust where trustee is also a Director of the Lending Bank. 

4. Application to Officers and Specified Employees of Foreign Banks

Although Para 15A directly addresses directors, its effect extends to officers and senior management of foreign bank branches in the following manner:

  1. Officers cannot sanction or process lending proposals that would violate Section 20 as clarified by Para 15A.
  2. Internal delegation or operational autonomy does not override statutory prohibitions.

Further, under the Related Party Lending framework (Chapter V), officers classified as specified employees are subject to disclosure obligations, recusal from decision-making, arms-length pricing and approval norms as per the Credit Policy of the bank.

5. Application to Board of Directors of Foreign Bank (Abroad)

Para 15A squarely applies where a Director of the Foreign Bank abroad has substantial interest, control, directorship, promoter position or guarantee obligation in regard to the Indian Borrower Entity. In such a case, the Indian branch must treat the borrower as prohibited even if the lending transaction has taken place in India. The foreign Director has no role in the Indian branch.

The restriction extends to Indian subsidiaries of foreign holding companies, step down subsidiaries and group entities where foreign Director has any indirect interest.   

6. Application to Indian Entities

Indian entities are covered if a Foreign Bank’s Director has interest or control or if the entity is a subsidiary of any other Indian or foreign entity in which such Director is interested. However, the prohibition still applies, irrespective of the Indian entity being listed or unlisted or fund lending being fund based or non-fund based.

7. Application to Foreign Entities 

Similarly, on account of Para 15A, foreign persons and entities may also be treated as related parties due to control, shareholding, or board nomination rights where lending to foreign entities is otherwise permissible, materiality thresholds, Board/Committee approvals, and recusal norms shall apply and any structure designed to circumvent Para 15A through offshore routing may be treated as regulatory evasion.

8. Conclusion  

The norms clearly provide that the foreign banks must also follow regulatory requirements on conflict of interest specified in the BR Act read with CRM Directions. Thus, the Indian branches of foreign banks must carefully check the interests of overseas board members, and loan decisions must look at governance issues as well as normal credit risk. If these rules are not followed, the bank may face regulatory action, fines, and disciplinary action against staff.

Therefore, Para 15A makes sure that foreign bank branches in India follow the same ethical and safety standards as Indian banks. It stops foreign directors from indirectly giving benefits to themselves and protects the trust and stability of the Indian banking system. These rules apply broadly to foreign bank branches, their officers, overseas boards, and both Indian and foreign entities, based on who has interest, control, or influence and not on where they are located.

Our other resources:

  1. Lending to your own: RBI Amendment Directions on Loans to Related Parties
  2. Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting

Shastrarth 26 – Loans to related parties by banks and NBFCs

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In this edition of Shastratha, we deliberate on the regulatory framework, key concerns, and practical considerations relating to loans to related parties by banks and NBFCs, including governance expectations, prudential limits, and recent regulatory developments impacting such transactions.

Shastrarth can be viewed here – https://youtube.com/live/o87BhAcZPio

Our other resources on the subject:

https://vinodkothari.com/2026/01/rbi-brings-revised-norms-on-related-party-lending-and-contracting/

https://vinodkothari.com/2026/01/lending-to-your-own-rbi-amendment-directions-on-loans-to-related-parties/

PPT for Shastrarth:

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Lending to your own: RBI Amendment Directions on Loans to Related Parties

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-Team Finserv | finserv@vinodkothari.com

On January 5, 2026, the RBI issued the Amendment Directions on Lending to Related Parties by Regulated Entities. Pursuant to this, changes were introduced to Reserve Bank of India (Non-Banking Financial Companies – Credit Risk Management) – Amendment Directions, 2026 (CRM Amendment Directions) and Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, Amendment Directions, 2026. Previously, Draft Directions were also issued on the subject. Our write-up on the draft directions can be accessed here.

Highlights

Applicability and Effective Date

The amendments under CRM Directions shall apply to all NBFCs, including Housing Finance Companies (HFCs) with regard to lending by an NBFC to its ‘related party’ and any contract or arrangement entered into by an NBFC with a ‘related party’. However, Type 1 NBFCs and Core Investment Companies shall not be covered under the applicability. 

These amendments shall come into force on 1 April 2026. NBFCs may, however, choose to implement the amendments in their entirety from an earlier date.

In addition to complying with the provisions of the Amendment Directions, listed NBFCs shall continue to adhere to the applicable requirements of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time.

Grandfathering of existing arrangements: Existing RPTs that are not compliant with these amendments may continue until their original maturity. However, such loans, contracts, or credit limits shall not be renewed, reviewed, or extended upon expiry, even where the original agreement provides for renewal or review.

Any enhancement of limits sanctioned prior to 1st April 2026 shall be permitted only if they are fully compliant with these amendments.

Relevant Definitions 

Related Party

RPs under Amendment DirectionsWhether covered in the Present Regulations
(A) Related Persons: These can be non-corporate
a promoter, or a director, or a KMP of the NBFC or relatives of the said (natural) personAll other persons except the promoter was covered
Person holding 5% equity or 5% voting rights, singly or jointly, or relatives of the said (natural) personNo
Person having the power to nominate a director through agreement, or relatives of the said (natural) personNo
Person exercising control, either singly or jointly, or relatives of the said (natural) personYes
(B) Related Parties: These can be any person other than individual/HUF, and cover Entities where (A) Covered Partially
is a partner, manager, KMP, director or a promoterPromoter not covered
hold/s 10% of PUSCHolds lower of (i)10% of PUSC and (ii)₹5 crore in PUSC
has single or joint control with another personYes
controls more than 20% of voting rightsNo
has power to nominate director on the BoardNo
are such on the advice  direction, or instruction of which the entities are accustomed to actNo
is a guarantor/suretyYes
is a trustee or an author or a beneficiary (where entity is a private trust)No
Entities which are related to (A) as subsidiary, parent/holding company, associate or joint ventureYes

The definition of “Related Party” remains unchanged from that provided under the Draft Directions. 

Further, a clarification have been added where an entity in which a related person has the power to nominate a director solely pursuant to a lending or financing arrangement shall not be regarded as a related party.

Related Person

Under the Draft directions, the definition of a “related person” included group entities. However, pursuant to the Amendment Directions, group entities have been expressly excluded from the scope of “related person.” The provisions are specific for lending to directors, KMPs and their related parties. In the case of lending to entities such as subsidiaries and associates, the NBFC must adhere to the concentration norms as prescribed under the CRM Directions. 

Specified Employees

The definition of “Senior Officer” as provided under the erstwhile regulations (Para 4(1)(vii) of the Credit Risk Management Directions) has been omitted and, in its place, the concept of “Specified Employees” has been introduced. “Specified Employees” has been defined to mean all employees of an NBFC who are positioned up to two levels below the Board, along with any other employee specifically designated as such under the NBFC’s internal policy.

Under the erstwhile regulations, the term “Senior Officer” was given the same meaning as defined under Section 178 of the Companies Act, 2013. Thus, the terms Senior Officer included the following:

  1. Members of the core management team,
  2. All members of management who are one level below the Executive Directors,
  3. Functional heads

Practically, this change implies that one additional hierarchical level would now need to be designated as “Specified Employees”. Further, the specific inclusions that earlier applied under the Companies Act and the LODR Regulations i.e., functional heads under the Companies Act and CS and CFO under the LODR will no longer be automatically covered, unless they fall within two levels below the Board or are specifically designated as such under the NBFC’s internal policy.

Meaning of “Lending”

‘Lending’ in the context of related party transactions would include funded as well as non-fund-based credit facilities to related parties. It may further be noted that investments in debt instruments of related parties are specifically included within the ambit of lending. Accordingly, the scope is not just restricted to loans and advances but includes all fund based and non-fund based exposures as well as investment exposures. 

Principles to be followed while lending to a related party

While lending to related parties, the following principles and provisions are to be followed by NBFCs:

  1. Credit Policy

The credit policy of the NBFC must contain specific provisions on lending to RPs. Mandatory contents of such policy will include:

  1. Definition of RPs and Specified Employees
  2. Safeguards to address the risks emanating from lending to related parties
  3. Provisions relating to lending to ‘specified officers’ of the NBFC and their relatives
  4. Provisions related to a suitable whistleblower mechanism for employees to raise concerns over irregular and unethical loans to RPs. Any kind of quid pro quo arrangements should also be prohibited.
  5. Materiality Thresholds for sanctioning of the loans
  6. Interested parties to recuse themselves
  7. Limits for lending to RPs, including sub-limits for lending to a single related party and a group of related parties
  8. Monitoring mechanism for such loans to RPs. This would include the designation of a specified authority for monitoring as well as reporting to the Board/Board committee. Further, procedure in case of deviation from the policy must also be prescribed. 

Earlier, the policy requirement was specifically applicable in case of base layer NBFCs, but now the same has been made applicable for all NBFCs. 

  1. Board approved limits for lending to RPs

The CRM Amendment Directions also mandate prescribing board-approved limits for lending to RPs. Further, sub-limits will also have to be prescribed for lending to a single RP and a group of RPs. Here, a question may arise on what basis will the NBFC prescribe such limits? Such limits may be prescribed after considering the ticket size of the loans generally offered by the Company, to ensure the loans to RPs are aligned with the loan products for general customers. The limit may be specified as a percentage of the NOF of the NBFC, similar to the credit concentration limits. 

  1. Materiality Thresholds

NBFCs may extend credit facilities to related parties in accordance with their Board-approved credit policy. Any such lending must be within the board-approved limit prescribed for lending to RPs (including a single RP and a group of RPs). 

Further, under the Amendment Directions (Para 13G of the CRM Amendment Directions), RBI has now clearly laid down materiality thresholds for such lending to related parties, including those to directors, senior officers, and their relatives. Lending above the prescribed materiality threshold should be sanctioned by the Board/Board Committee of the NBFC. (other than the Audit Committee).

It may be noted that earlier, for middle and upper layer NBFCs, any loans aggregating to ₹ 5 Crore and above were to be sanctioned by the Board/Board Committee. The materiality thresholds prescribed under the Amendment Directions are based on the layer of the NBFC, as follows:

Category of NBFCsMateriality Threshold
Upper Layer and Top Layer₹10 crore
Middle Layer₹5 crore
Base Layer₹1 crore
Layer of the NBFC shall be based on the last audited balance sheet.For loans, materiality threshold shall apply at individual transaction level

Can the power to sanction loans be delegated to the Audit Committee?

The CRM Amendment Directions have defined the Committee on lending to related parties which will mean a committee of the Board of the NBFC entrusted with sanctioning of loans to related parties. NBFCs may also identify any existing Committee, other than the Audit Committee, for this purpose.

Further, para 13I provides that,

However, a NBFC at its discretion, may delegate the above powers of lending beyond the materiality threshold to a Committee of the Board (hereafter called Committee) other than the Audit Committee of the Board

Accordingly, on a reading of the above, it seems that the power to sanction loans cannot be provided to the Audit Committee of the Board. 

  1. Monitoring and Reporting Mechanism
  1. NBFC shall maintain and periodically update the list of all related persons, related parties, and loans sanctioned to them. This will be in addition to the list of related parties of the NBFC, which comes from the Companies Act, 2013, LODR and Accounting Standards.
  2. The list shall be reviewed at regular intervals to ensure accuracy and compliance.
  3. Credit facilities sanctioned to specified employees and their relatives shall be reported to the Board annually.
  4. Any deviation from the lending policy on related parties, along with reasons, shall be reported to the Audit Committee or to the Board where no Audit Committee exists.
  5. Products/structures circumventing these Directions (reciprocal lending, quid pro quo) shall be treated as related party lending.

5. Quid Pro Quo Arrangements

The CRM amendment directions also provide that any arrangements which aim at circumventing the Amendment Directions will be treated as lending to RPs. Accordingly, any such arrangements involving reciprocal lending to related parties shall be subject to all the provisions of this direction. 

  1. Refrain from participation

Para 13J requires that Directors, KMPs and specified employees must recuse themselves from any deliberations or decision-making on loan proposals, contracts or arrangements that involve themselves or their related parties. This obligation also applies to all subsequent decisions involving material changes to such loans, including one-time settlements, write-offs, waivers, enforcement of security and implementation of resolution plans, to ensure independence and avoid conflicts of interest.

Financial Statements Disclosures

Details of exposure to related parties as per these Directions shall be disclosed in the Notes To Accounts pursuant to para 21(9A) of the Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, 2025 in the following format:

(Amt in ₹ Crore)
Sr. NoParticulars Previous YearCurrent Year
Loans to Related Parties
1Aggregate value of loans sanctioned to related parties during the year
2Aggregate value of outstanding loans to related parties as on 31st March
3Aggregate value of outstanding loans to related parties as a proportion of total credit exposure as on 31st March
4Aggregate value of outstanding loans to related parties which are categorized as:
(i) Special Mention Accounts as on 31st March
(ii) Non-Performing Assets as on 31st March
5Amount of provisions held in respect of loans to related parties as on 31st March
Contracts and Arrangements involving Related Parties
6Aggregate value of contracts and arrangements awarded to related parties during the year
7Aggregate value of outstanding contracts and arrangements involving related parties as on 31st March

Comparison at a Glance

ParametersExisting GuidelinesAmendment Directions
ApplicabilityNBFC-BL- only policy requirement was prescribedNBFC-ML and above – threshold, approval and reporting was applicableNBFCs in all layers, except Type 1 and CICs
Materiality Threshold/ Threshold for seeking board approvalNBFCs-BL- As per the PolicyNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 5 croreNBFCs-BL- Rs. 1 croreNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 10 crore. Lending beyond the MT requires board or board committee approval (other than AC).
Board approved limits for lending to RPsNo such limit was required to be prescribedPolicy shall specify aggregate limits for loans towards related parties. Within this aggregate limit, there shall be sub-limits for loans to a single relatedparty and a group of related parties.Lending beyond the board approved limit, requires ratification by the Board/AC.
MonitoringLoans and Advances to Directors less than ₹5 crores shall be reported to the Board.
Further, all loans and advances to senior officers shall be reported to the Board.		Para 13K: Maintain and periodically update list of related persons, related parties, and loans to them.
Para 13L: Annually report credit facilities to specified employees and relatives to the Board.
Para 13M: Quarterly or shorter internal audit reviews on adherence to related party guidelines.
Para 13N: Report deviations and reasons to the Audit Committee or Board.
Para 13O: Products/structures circumventing Directions (reciprocal lending, quid pro quo) shall be treated as related party lending.
Policy RequirementOnly for NBFC-BL. NBFCs were required to prescribe a threshold beyond which the loans shall be required to be reported to the BoardApplicable for all NBFCs.  
Recusal by interested partiesDirectors who are directly or indirectly concerned or interested in any proposal should disclose the nature of their interest to the Board when any such proposal is discussedInterested parties, including specified employees to recuse themselves
Disclosure under FSRelated Party Disclosure were specified as per format prescribed under Para 21(9) of Financial Statement Disclosures DirectionsIn addition to the earlier requirement, another format has been prescribed under Para 21(9A) with respect to details of exposures to related parties
Power to sanction loans to RPsFor NBFCs-BL: Only reporting is required; no board approval
For NBFCs-ML and above: Board approval required for loans above the threshold.		For all NBFCs:Loans above materiality threshold shall be sanctioned by Board or delegated Committee (not Audit Committee)
Loans below the threshold shall be sanctioned by appropriate authority as defined under the Policy.

Our Other Resources:

Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting

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– Team Corplaw | corplaw@vinodkothari.com

Continuing with the spree of regulatory changes brought in 2025, RBI has issued Amendment Directions on Lending to Related Parties by Regulated Entities. Separate notifications have been issued for each regulated entity, based on the draft Directions for lending and contracting with related parties issued on 3rd October, 2025. We discuss the changes brought in for commercial banks by way of the RBI (Commercial Banks – Credit Risk Management) – Amendment Directions, 2026 and RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Amendment Directions, 2026. 

Highlights:

  • New rules apply from 1st April, 2026. Existing facilities, if in breach of the new provisions, can continue to run down; however, shall not be renewed or extended
  • Related Party: the meaning of the word is quite different from the commonly understood expression under the SEBI Regulations or Companies Act. Hence, banks will maintain a parallel list of related parties under the CRM Directions
    • Primarily concerned with directors, KMPs and their interested persons and entities
    • Related party = Related person (RP) + Reciprocally Related person (RRP) + Specific entities in which RP or RRP are interested
  • Contracts or arrangements enumerated in sec. 188 (1) of Companies Act also covered
  • Lending to or contracts with Specified Employees
    • means employees 2 levels below the Board or as designated by the Board 
    • left to the Policy to be framed by the Bank
    • To be reported to the Board annually 
  • Board approved Policy on CRM
    • To include aspects related to lending to RPs 
    • Specify aggregate limits and sub-limits for lending to RPs including single RPs
    • To incorporate whistleblower mechanism to raise concerns over questionable loans to RPs and quid pro quo arrangements 
    • Any deviation from policy to be reported to Audit Committee 
  • Restrictions on lending by banks 
    • to its promoters and their relatives; shareholders with shareholding of 10 per cent or more in the paid-up equity capital of the bank; as also the entities in which they (promoters, their relatives and shareholders as stated above) have significant influence or control (as defined under Accounting Standards Ind AS 28 and Ind AS 110).
    • In addition to restrictions on lending to directors and interested entities under section 20 of BR Act
  • “Materiality threshold” for lending to related parties
    • based on the capital of the bank – from Rs 5 crores to Rs 25 crores 
    • lending over the materiality threshold requires approval of board/ a committee on lending to RPs
    • Does not include (i) credit facilities fully secured by cash or liquid securities, and (ii) interbank loans
  • Committee on lending to RPs 
    • Bank may identify any existing committee, other than the Audit Committee
    • Does it mean the Audit Committee cannot sanction approval for loans to RP? 
  • Recusal of interested parties from deliberations and discussions on loan proposals, contracts or arrangements involving them or their related parties 
  • Internal auditors to review, on a quarterly or shorter intervals, adherence to the guidelines and procedures in relation to related party lendings.

Immediate Actionables 

  • Designate a board committee for sanction of loans to related parties beyond materiality thresholds 
  • Identify and maintain a list of related parties as per the definition under the Amendment Directions 
  • Modify and adopt a revised Credit Risk Management Policy in line with the requirements of the Amendment Directions 
  • Adopt limits and sub-limits for (a) aggregate transactions with RPs, (b) transactions with each RP and (c) transactions with a group of RPs 
  • Sensitise relevant business teams on the materiality thresholds and the internal Credit Policy of the Bank 
  • Engage the services of internal auditors for periodic review (quarterly or shorter intervals)

RPT Framework: Amendment Directions vis-a-vis Companies Act and LODR

Point of comparison CRM Amendment Directions Listing RegulationsCompanies Act
Scope of coverageLoans, non-funded facilities, investment in debt securitiesAny transfer of resources, obligations or servicesContracts as enumerated u/s 188 (1)
Meaning of related partyDirectors, KMPs, promoter, their relatives, entities in which either of them have specified interest (partnership, shareholding, control, etc).Does not include Company’s own holding company, subsidiaries or associatesWide definition, including sec 2 (76) of CA, accounting standards, promoter, promoter group entities, shareholders with 10% or more shareholdingAs defined in sec. 2 (76), primarily including directors, KMPs, their relatives, private cos where such persons are a director or member, public companies with directors’ 2%  shareholdings.Includes entity’s own subsidiaries, associates, JVs, holding company
Concept of “reciprocally related party”In line with the statutory restrictions, includes directors/relatives on the boards of other banks, AIFIs, trustees of mutual funds set up by other banksDoes not exist; however, a purpose-and-effect test exists whereby surrogate transactions may be covered.Does not exist
Primary approving bodyCommittee on Lending to Related Parties, or the BoardAudit CommitteeAudit Committee; or the Board
Shareholders’ approvalNot requiredRequired if crossing materiality thresholdRequired if not on in ordinary course of business+ arm’s length, and crossing materiality threshold
Materiality thresholdBeing linked with a single loan exposure, ranges from Rs 5 crores to Rs 25 crores depending on Bank’s capitalBeing aggregated for transactions during a FY, ranges from 10% of the entity’s consolidated turnover to Rs 5000 crores based on consolidated turnover of the entity Usually based on 10% of turnover or net worth (depending on transaction type)

See our related resources here:

https://vinodkothari.com/2026/01/lending-to-your-own-rbi-amendment-directions-on-loans-to-related-parties/

https://vinodkothari.com/2026/01/shastrarth-26-loans-to-related-parties-by-banks-and-nbfcs/

Does Co-lending Make Default a Communicable Disease?

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How to ensure uniform asset classification under co-lending

Simrat Singh | finserv@vinodkothari.com

Asset classification under RBI regulations has always been anchored to the borrower, not to individual loan facilities. Once a borrower shows repayment stress in any exposure, it is no longer reasonable to treat the borrower’s other obligations as unaffected; prudence requires that all other facilities to that borrower reflect the same level of stress. Even the insolvency law reinforces this borrower-level approach to default by allowing CIRP to be triggered irrespective of whether the default is owed to the applicant creditor or not (see Explanation to section 7 of the IBC). 

This borrower-level approach is not unique to India. Globally, the Basel framework also defines default at the obligor level – the core idea being that credit stress is a condition of the borrower, not of a single loan. In other words, when a borrower sneezes financial distress, all his loans catch a classification cold.

Position under the earlier co-lending framework

Under the earlier 2020 framework for priority sector co-lending between banks and NBFCs, each RE applied its own asset classification norms to its respective share of the co-lent loan (see para 13 of 2020 framework). This allowed situations where the same borrower and same loan could be classified differently in the books of the two co-lenders. While operationally convenient, this approach sat uneasily with the borrower-level logic of RBI’s IRACP norms and diluted the consistency of credit risk recognition in a shared exposure.

Position under the Co-Lending Arrangements Directions, 2025

The 2025 Directions [now subsumed in Para B of the Reserve Bank of India (Non-Banking Financial Companies – Transfer and Distribution of Credit Risk) Directions, 2025] resolve this inconsistency by requiring uniform asset classification across co-lenders at the borrower level (see para 124 reproduced below for reference).

124. NBFCs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the REs classifies its exposure to a borrower under CLA as SMA / NPA on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. NBFCs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day.

Therefore, where one co-lender classifies its share of a co-lent exposure as SMA or NPA, the other co-lender must apply the same borrower classification to its share of the same exposure. It was an extension of RBI’s long-standing borrower-wise classification principle into a multi-lender structure.

Why “under the CLA” cannot be read in isolation

However, the wording of paragraph 124 has, in practice, been interpreted by some lenders in a much narrower manner. The phrase “under the CLA” has been read to mean that the classification of the other co-lender’s share would change only if the borrower defaults on the co-lent exposure itself. On this interpretation, where a borrower defaults on a separate, non-co-lent loan, lenders may in their books follow borrower level classification but they need not share such information with the co-lending partner since there is no default in the co-lent loan.

This approach, however, runs contrary to the regulatory intent and represents a classic case where the literal reading of a provision is placed in conflict with its underlying purpose. Market practice reflects this divergence. Traditional lenders have generally adopted a conservative approach, applying borrower-level classification across exposures irrespective of whether the default arises under the CLA. Certain other lenders, however, have taken a more aggressive position, limiting classification alignment strictly for defaults under the co-lent exposure. The conservative approach is more consistent with RBI’s prudential framework and intent, which has always treated credit stress as a condition of the borrower rather than of a particular loan structure.

Implications for other exposures to the same borrower

Once borrower-level classification is accepted as the governing principle, the consequence is straightforward: any other exposure that a co-lender has to the same borrower must also reflect the borrower’s SMA or NPA status, even if that exposure is not part of the co-lending arrangement. Let us understand this by way of examples.

Scenario 1: Multiple Loans, No Co-Lending Exposure 

A borrower has three separate loans:

  1. L1: 100% funded by A
  2. L2: 100% funded by B
  3. L3: 100% funded by C

Although A, B and B may be co-lending partners with each other in general, none of the above loans are under a co-lending arrangement (CLA).

Treatment: Since there is no co-lent exposure to the borrower, paragraph 124 of the Directions does not apply. Each lender classifies and reports its own loan independently, as per its applicable asset classification norms. There is no obligation to share asset-classification information relating to these loans among the lenders.

Scenario 2: One Co-Lent Loan and Other Standalone Loans

A borrower has three loans:

  1. L1: Co-lent by B (80%) and A (20%)
  2. L2: 100% funded by A (not co-lent)
  3. L3: 100% funded by C (not co-lent)

Case A: Default under the Co-Lent Loan

If B classifies its 80% share of L1 as NPA:

  • A’s 20% share of L1 must also be classified as NPA, even if it was standard in A’s books. While given that the asset classification norms for different REs are aligned and the invocation of any default loss guarantee also does not impact the asset classification; there does not seem to be any reason for a difference in the asset classification of the co-lenders in this case.  
  • Since asset classification is borrower-level, A must also classify L2 as NPA, even though L2 is not under a co-lending arrangement.
  • L3 remains unaffected, as C is not a co-lender to the same borrower and there is no requirement for B or A to share borrower-level information with C.

Case B: Default under a Non-Co-Lent Loan by any one of the Co-Lenders

If A classifies L2 as NPA:

  • Since asset classification is borrower-level, A must also classify L1 as NPA
  • B’s 80% share of L1 must also be classified as NPA
  • L3 remains unaffected, as C is not a co-lender to the same borrower and there is no requirement for B or A to share borrower-level information with C.

Case B: Default under a Non-Co-Lent Loan of a Third Lender

Assume L3 is classified as NPA by C, while L1 and L2 remain standard.

  • There is no impact on the books of B or A.
  • C is not required to share information on L3 with B or C, as there is no co-lending exposure between them for this borrower.

Note that borrower-level asset classification and information sharing activates only where there is a co-lending exposure to the borrower. Once such an exposure exists, any default in any loan of a co-lender triggers borrower-level classification across all exposures of that lender, including standalone loans. However, lenders with no co-lending exposure to the borrower remain outside this information-sharing loop. May refer the below chart for more clarity:

Fig 1: Decision chart for asset classification of loans under co-lending

Information Sharing and Operational Impact

To make borrower-level classification work in practice, the 2025 Directions require co-lenders to put in place information-sharing arrangements. Any SMA or NPA trigger must be shared with the other co-lender promptly and, in any case, by the next working day. It requires aligned IT systems so that both lenders update their books on the borrower at the same time, or as close to real time as possible.

Conclusion

The 2025 Directions reinforce a long-standing regulatory principle: credit stress belongs to the borrower, not to a specific loan or lender. Uniform borrower-level classification and timely information sharing are essential to preserve consistency in risk recognition across co-lenders. While this increases operational complexity, it aligns co-lending practices with RBI’s prudential intent.

See our other resources on co-lending.

12 hours Certificate Course on Nuts and Bolts of Related Party Transactions

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Register here: https://forms.gle/E73K7WezRi1TptLk7

VKCo Certificate Course on Related Party Transactions_Feb 2026Download

Our other resources:

  1. Related Party Transactions- Resource Centre
  2. Moderate Value RPTs : Interplay of disclosure norms and impracticalities
  3. SEBI approves relaxed norms on RPTs 

Cross Border Mergers

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– Neha Malu, Associate | corplaw@vinodkothari.com

Cross-Border Mergers.pptxDownload

Refer to our other resources:

  1. Presentation on Cross Border Mergers
  2. Guide to Cross Border Mergers
  3. Outbound Mergers – A path still less travelled by?