Social spending for social companies: The paradox of CSR spend for not-for-profit companies

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Ankit Singh Mehar, Assistant Manager | corplaw@vinodkothari.com

Statutory provisions for mandatory CSR spending envisage that companies go out of their business models, and “give back to the society” at least to the extent of 2% of their net profits. The underlying principle is that before the profits are distributed to the stakeholders, companies should contribute a minimal amount on social engagement. However, how do we relate this requirement to a company which does not exist for profit-making? How do we relate it to a company which cannot distribute even one penny, in whatever form, to its shareholders? Or all the more importantly, how do we relate this to a company whose business model itself is for some social good? It is formed for, and exists for social good, and that is what it does. So how does the company spend that 2% on social good, if that is what the company does with all that it earns?

We are talking about section 8 companies, which are commonly referred to non-profit organizations (NPOs), or not-for-profit (NFP) companies. A lot of NPOs exist in non-corporate form – e.g. trusts, where the question of applying sec 8 of the Companies Act, 2013 (‘‘Act’’) will not arise. However, there is an increasing number of NPOs registering as sec 8 companies. As on October, 2024[1][2], there are 52000+ companies registered as sec 8 companies in India, of which nearly 40,000+ companies are registered on Darpan Portal.[3] These companies may not exist for profits, but of course, they may make profits. If they make profits, the question of applicability of sec. 135 of the Act comes – whether a 2% of the average profits needs to go “outside the business model” into activities that are listed in Schedule VII.

Before we delve any further, it is important to note that not every company licensed u/s 8 is engaged in activities listed in Schedule VII. To cite examples: a sec 8 co may be running a hospital or educational institution which serves the higher segments of the population pyramid. A sec 8 co may be running a microfinance business or be running as an industry association such as Association of Mutual Funds in India (AMFI) or Association of Registered Investment Advisers (ARIA). The key feature of a sec 8 is the bar on distribution of profits, whereas Schedule VII has a list of activities which are treated as CSR-eligible.

So, the questions that we are trying to answer in this write up are:

  • Will a company, whose business model is to carry the activities listed in Schedule VII, for the masses and social good, have to spend 2% of the profits on CSR over and above their routine spending?
  • Will a company, whose business model is to carry the activities listed in Schedule VII, but not for masses or BoP (base of pyramid) segment, have to spend 2% of the profits on CSR?
  • Will a company, whose business model is to not engage in activities listed in Schedule VII, have to spend 2% of the profits on CSR?
  • In either case, even if there is no spending requirement, will the company have to do procedural compliance, viz., a CSR Committee, to examine the obligations of the company from a large social perspective, and give a report to the Board whether the company at all needs to go beyond its domain and spend on a larger social good?

Fitting into the ‘frame of CSR’ – the paradox!

A company required to spend on CSR is inter-alia required to ensure two things while selecting for an activity / project to be undertaken:

  1. The activity / project proposed to be undertaken should be covered under the Schedule VII of the Act; and
  2. The activity / project proposed to be undertaken should satisfy the condition set out under rule 2(1)(d) of CSR Rules[4].

Rule 2(1)(d) of CSR Rules inter-alia states that an activity undertaken in pursuance of normal course of business of the company cannot be undertaken as a CSR activity / project. Now, for a section 8 company which undertakes activities covered under Schedule VII of the Act in its normal course of business, complying with section 135 would become an impossibility. On one hand, such a company is obligated to spend 2% of its net profits on Schedule VII activities. On the other hand, if the company does so, one may also contend that such activity is in its normal course of business which is prohibited under the regulatory framework for CSR.

Further, Section 8 companies can also act as an ‘implementing agency’ for the companies covered u/s 135(1) of the Act. An implementing agency essentially undertakes CSR activities / Schedule VII activities on behalf of a company. Therefore, even for a section 8 company acting as an implementing agency, it is engaged in Schedule VII activities in its normal course and being as such it is likely to receive restricted funds specifically provided for implementing CSR projects. Accordingly, if a sec. 8 company undertakes any Schedule VII activity to fulfil its own CSR obligation, it may, in effect, be pursuing an activity that forms part of its normal course of business, thereby conflicting with the prohibition under the CSR regulatory framework.

Another interesting situation to be noted is a case where a sec 8 company being an implementing agency or a beneficiary receives restricted funds which could not be entirely spent in a particular financial year due to a number of reasons, say, disbursement by a company just before conclusion of the financial year. In such a case, it will be absolutely illogical to consider the increase in the net profit of the company to the extent attributable to unutilized restricted funds. The reasoning is simple – when the company does not have the discretion to use these funds freely and they are earmarked for a specific purpose, considering such amounts as income and hence, part of profits for the company in the context of CSR applicability or spending should be incorrect.

Now, coming back to the issue, even if one takes the view that such section 8 company may undertake, as a CSR activity / project, any Schedule VII activity other than those it already undertakes in its normal course of business, this contention would be counterintuitive, as it would essentially create no distinction between the activities such section 8 company is already undertaking and the ones it would otherwise be required to pursue.

Regulator’s take on the issue

The position discussed in the Report of the Companies Law Committee[5] is as follows:

XXX

The High level CSR Committee had recommended for Section 8 companies to be exempted from the provisions on CSR. It had been noted by the said Committee that “Section 8 companies are ‘not for profit’ companies registered under Section 8 of the Companies Act, 2013 (Section 25 of Companies Act, 1956) with the basic object of working in social and developmental sector. Their involvement in charitable and philanthropic activities is already 100 percent. These companies prepare income and expenditure statements which reflect the surplus/deficit of an organization and not the profit of the company. The surplus accrued to such company is not distributed amongst members, but is ploughed back to the expenditure of the company, that in turn is spent on social welfare activities already included in Schedule VII. Therefore, it may be not necessary for these companies to undertake CSR activities outside the ambit of their normal course of business.” The Committee, however, felt that it would not be appropriate to give differential treatment to section 8 companies in the matter of providing exemptions from compliance of CSR provisions, as there are certain areas where examples could be found of section 8 and other companies co-existing, for example, companies in microfinance business. Further, there should not be a difficulty in section 8 companies using the prescribed percentage of its surplus for CSR activities. Thus, it was decided not to recommend for exemption of Section 8 companies from the CSR provisions of the Act.

XXX

The recommendations of the High Level CSR Committee (’HLC’) were not accepted and no exemption was conferred upon section 8 companies from the CSR provisions. However, the views of the HLC are still relevant for a section 8 company which is otherwise engaged in Schedule VII activities in its normal course of business. Their contribution towards CSR activities is 100 percent (far beyond the regulatory threshold of 2% of networth). Therefore, requiring them to comply with the CSR provisions seems to be quite quixotic.

Worthwhile to note that even the FAQ of ICSI on section 8 company states that a section 8 Company would not be considered as compliant with CSR provision if it contributes the CSR amounts towards its own activities which may be charitable in nature and in line with the CSR approved.

7.2 Is Section 8 Company compliant if it contributes the CSR amounts towards its own activities which may be charitable in nature and in line with the CSR approved areas of spent?

No, spending by the company in its own activities will not qualify as CSR spend. The amount needs to be spend on activities other than normal activities of the company and not for the benefit of the company or its employees.

Seemingly, the FAQ confirms, to some extent, the paradox discussed above. However, we humbly hold a different view for the reasons discussed below.

What looks like a sensible interpretation?

1.     For sec 8 companies carrying on CSR like activities and reaching masses

To take a view on the subject matter, one may look into the basic intent of the CSR provisions. The idea behind CSR is to ensure that besides the business motive, companies should be doing ‘social spending’ so that it gives back to the society from where it is earning its bread and butter. In other words, the idea is that besides distributing the profits to the shareholders, a company is also expected to undertake certain activities for the welfare of the society by taking out certain portions of its profits. A section 8 company engaged in Schedule VII activities in its normal course of business is already fully engaged in social development and contributes significantly towards social causes. More so, their entire profits are applied towards social activities only. In this way, one can logically conclude that such a section 8 company is already compliant with the true spirit of CSR.

Therefore, for a section 8 company discussed above which is covered u/s 135(1) of the Act, the sensible interpretation would be to ignore the stipulation mentioned under rule 2(1)(d)(i) of CSR Rules which states that ‘activities undertaken in pursuance of normal course of business of the company’ are not in the nature of eligible CSR activities. To contend otherwise would be to fall squarely into the paradox discussed above. Accordingly, in our view, while all the other requirements envisaged in CSR provisions including constitution of CSR committee, formulating a CSR policy, preparing a CSR report etc., would require to be complied by a section 8 company, it may consider not to undertake a separate CSR activity/ project and spent 2% of its net profit thereon since the activities undertaken by its are eligible CSR activities itself. In this regard, the committee or similar body in a section 8 company should take note of such a situation and explicitly take note of the fact that since it is already pursuing CSR activities by the nature of activities, it need not spend funds additionally for some other project thereby putting its existing projects at stake.

Accordingly, in this case, the compliances that would be required to be observed in this case would be as follows:

  1. Constitution of CSR committee
  2. Formulating a CSR policy (wherein the said policy should include a reference of this interpretation in the context of mandatory CSR spending) and making the same available on the website of the company;
  3. Approval of the minimum budget and Annual Action Plan (here the AAP would refer to include those spending areas for the specific year which are to be considered for this obligation);
  4. Monitoring of the specific part of the spending that is considered to be made as a part of CSR spending; and
  5. CSR Reporting i.e. providing CSR report in the Board’s report and filing of form CSR-2.

For example: say a company is spending INR 15 lacs across three projects (Project 1: Healthcare – 10 lacs, Project 2: Education – 4 lacs and Project 3: Sports – 1 lac). Suppose the CSR obligation of the company comes to INR 1 lac. Now, for the purpose of compliance, the company may consider the expenditure towards Project 3 as its CSR expenditures. Accordingly, the following shall also ensue:

  1. The AAP shall contain details about Project 3 in manner set out in rule 5 of CSR Rules
  2. The spending on Project 3 shall also be reported in the CSR report forming part of the board’s report and form CSR-2.
  3. The CSR committee shall be required to monitor the progress of Project 3 on a periodic basis.

2.     For sec 8 companies either not carrying out CSR like activities or those serving the privileged segment of society

Unlike the views shared above, the same cannot be applied in cases where the sec 8 company is not serving the BoP segment of the society. For such entities, the intent is not to serve or reach out to the masses but to serve the privileged segment of the society. In doing so, the cost for the services offered is so high that a normal public cannot afford and therefore, even though the nature of service is that of a social good, it is limited to the privileged section of the society. In such cases, if the sec 8 company falls under the ambit of mandatory CSR spending, it needs to go out of its normal course of business and actually carry out CSR activities based on its CSR policy and comply with all other requirements as would have been made applicable to any other non-sec 8 company covered under section 135 of the Act. On the other hand, for sec 8 companies not pursuing CSR like activities (as in those falling under Sc VII), there also the need to comply with the CSR spending and other related provisions will be made applicable.

Read our other resource material on CSR here

[1] https://sansad.in/getFile/loksabhaquestions/annex/183/AU5_HFf4SO.pdf?source=pqals&utm

[2] https://cag.gov.in/webroot/uploads/download_audit_report/2021/Report%20No.%2016%20of%202021_E%26SM_English_PDF%20A-061c1b9cbe2d147.22751655.pdf?utm#page=34

[3] https://ngodarpan.gov.in/#/

[4] means Companies (Corporate Social Responsibility Policy) Rules, 2014

[5] https://prsindia.org/files/bills_acts/bills_parliament/2016/Report_of_the_Companies_Law_Committee_3.pdf#page=47

Referral or Representation? The Fine Line Between LSP, DSA and Referral Partner

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Simrat Singh & Sakshi Patil | finserv@vinodkothari.com

India’s lending landscape is evolving from traditional, branch-led lending to digital and now “phygital” models, involving multiple intermediaries connecting borrowers and lenders. For regulated entities (REs), three different terms referring to loan intermediaries are commonly seen: Lending Service Providers (LSPs), Direct Selling Agents (DSAs) and Referral Partners. 

At first glance, these roles may appear similar since all “bring in business.” But as far as the RBI is concerned, the difference determines how much regulatory oversight the lender must exercise over these participants. This article attempts to answer who’s who in this lending chain, and more importantly, where a simple referral ends and a regulated lending function begins.

The Lending Trio: LSPs, DSAs and Referral Partners

LSPs: The digital lending backbone

In the digital lending framework, the most central participant is the LSP who are engaged by the REs to carry out some functions of RE in connection with its functions on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. The RBI’s Digital Lending Directions, 2025 define an LSP as:

“An agent of a RE (including another RE) who carries out one or more of the RE’s digital lending functions, or part thereof, in customer acquisition, services incidental to underwriting and pricing, servicing, monitoring, or recovery of specific loans or loan portfolios on behalf of the RE, in conformity with the extant outsourcing guidelines issued by the Reserve Bank.”

The emphasis on the term “agent” is crucial since being an agent becomes a precondition to becoming an LSP. An agent is a person employed to act for another; to represent another in dealings with third persons within the overall authority granted and can legally bind the principal by their actions (more discussion on agency later). This distinguishes an agent from a mere vendor or service provider who delivers a contracted service but has no authority to affect the principal’s relationship with third parties and neither is subjected to a degree of control from the principal.

DSAs: The traditional middle ground

DSAs, though not formally defined by the RBI, their appointment, conduct and RE’s oversight on them is governed by Annex XIII of the SBR Directions (Instructions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs) for NBFCs and by Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks for Banks. DSAs operate largely in physical or “phygital” lending models, focusing on loan sourcing. They represent the lender while dealing with potential borrowers. However, their functions are narrower than those of an LSP. A DSA’s role typically ends with lead generation and preliminary documentation, without involvement in underwriting, servicing or recovery. While the DSA is an agent, it plays a more limited role in the lending value chain and has minimal borrower-facing obligations post origination.

Referral Partners: The nudge before negotiation

Referral Partners perform the most limited role. They simply share leads or basic borrower information with the lender and have no authority to represent or bind the lender. Their role is confined to referral i.e. the providing the first nudge to the lender. They are treated as independent contractors or service providers, not agents and operate under commercial referral agreements. The RE does not exercise control over their operations, nor is it responsible for their actions beyond the agreed referral activity. The distinction lies not in what they do (introducing borrowers) but in what they cannot do i.e. represent the lender or perform any of its lending functions.

Referral ≠ Representation: The Agency Test

The most important question then arises “How does one determine whether a person is an LSP, DSA, or a referral partner?”. All three may assist in borrower acquisition, but the answer might lie in distinguishing referring from representing. To be classified as an LSP (or even a DSA), the person must first be the agent of the RE, not just a vendor or service provider. The test of agency has been laid down in the Supreme Court’s decision in Bharti Cellular Ltd. v. Commissioner of Income Tax1. The Court, in para 8, observed that the existence of a principal–agent relationship depends on the following elements:

  1. The authority of one party to alter the legal relationship of the other with third parties;
  2. The degree of control exercised by the principal over the agent’s conduct (less than that over a servant, but more than over an independent contractor);
  3. The existence of a fiduciary relationship, where the agent acts on behalf of and under the guidance of the principal;
  4. The obligation to render accounts to the principal, and the entitlement to remuneration for services rendered.

Further, the Court clarified in para 9 that the substance of the relationship, not just its form, determines whether agency exists. If a person is neither authorised to affect the principal’s relationship with third parties nor under its control, and owes no fiduciary obligation, the person is not an agent, regardless of what the contract calls them. 

Similarly, in Bhopal Sugar Industries v. Sales Tax Officer2, the Supreme Court had observed that the mere word ‘agent’ or ‘agency’ is not sufficient to lead to the inference that parties intended the conferment of principal-agent status on each other. Mere formal description of a person as an agent is not conclusive to show existence of agency unless the parties intend it so hence, “the true relationship of the parties in such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship.”

On the aspect of supervision and control, the Supreme Court in para 40 of the Bharti Cellular ruling stated:

An independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. But an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary….The distinction is that independent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons. An independent contractor is not required to render accounts of the business, as it belongs to him and not his employee.

In lending transactions, therefore, the relevant considerations to determine whether an agency exists or not may be:

  1. Does the agency have the authority, under a contract with the principal, to represent the principal to create any relationship with the borrower?;
  2. Does the agency have the authority to approach potential borrowers, representing that the agency can source a loan from the RE?;
  3. What is the role of the agency in the loan contract – is the loan contract established between the lender and the borrower through the agent?;
  4. Does the agency agreement control/regulate the manner of the agent’s dealings with the borrowers?;
  5. Effectively, is the agency the interface between the RE and the borrowers?

Paanwala and the Poster: Not everyone who sells a loan lead is an LSP

To illustrate the difference between LSP/DSA and Referral Partner, consider a simple example. You stop at your neighbourhood paanwala for your regular paan or pack of mints. Between the faded ads for mobile recharges and UPI QR codes, one new poster catches your eye “Need a personal loan? Look No Further ! Fast approvals”. Curious, you ask if the shopkeeper has joined the finance world. Smiling, he replies, “Arre nahi sahib, I just share numbers! You give me your name and phone number, I’ll send it to my guy. If your loan gets approved, I get a small tip!” No exchange of KYC documents, no app, no credit score. Now, does this make the paanwala an LSP under the Digital Lending Directions? He may appear as performing a part of the customer acquisition function of the lender so should he now comply with outsourcing norms, data protection protocols and grievance redressal requirements? Of course not.

The paanwala is a pure referral partner. His role ends with introducing a potential borrower to a contact connected to a lender. He does not represent the lender, verify or collect documents, underwrite, service, or recover loans, nor can he legally bind the lender through his actions. Mere referral, without agency and without performing a lending function, does not make one an LSP. Passing a phone number over a cup of chai does not amount to digital intermediation.

BasisReferral PartnerLSP
Scope of activityLimited to sharing leads with the lenderPerforms one or more of the lenders functions w.r.t in customer acquisition, services incidental to underwriting and pricing, servicing, monitoring, recovery
Access to prospective customer’s information and documentsOnly basic contact information necessary for the lender to approach the customer for the loan is sharedTo the extent relevant for carrying out its functions
RepresentationDoes not represent the RERepresents the RE
Agency & PrincipalNot an agentAppointed as an agent
DLGCannot provideCan provide (in case of Digital Lending and Co-lending)
Applicability of Outsourcing GuidelinesNot applicableApplicable
Mandatory due diligence  before appointmentNot applicableApplicable
Appointment of GRONo such requirementLSP having interface with borrower needs to appoint a GRO
Right to auditNo right of RERE has a right
Disclosure on the website of the lenderNot applicableApplicable

Table 1: Distinction between Referral Partner and LSP

Conclusion

As digital lending continues to expand in India, ensuring that every intermediary’s role aligns with its true legal character is essential. The key in determining the true nature of the relationship would ultimately rest on the contractual terms that must reflect the true nature of the relationship. Misclassifying these entities can expose lenders to compliance risks under RBI’s outsourcing and digital lending guidelines.

  1. [2024] 2 S.C.R. 1001 : 2024 INSC 148 ↩︎
  2. 1977 AIR 1275 ↩︎

Our resources on the same:

  1. Lending Service Providers for digital lenders: Distinguishing agency contracts and principal-to-principal contracts
  2. Principles of Neutrality for Multi-Lender Platforms
  3. Multi-lender LSPs – Compliance & Considerations
  4. Outsourcing (Direct Selling Agent) v. Business Correspondent route
  5. Resources on Digital Lending

Virtual Certificate Course on Grooming of Chief Compliance Officers of NBFCs

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12 hours Certificate Course on Insider Trading for Compliance Officers

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Representation on Consolidation of Directions 

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– Team Finserv | finserv@vinodkothari.com

In line with the Statement on Development and Regulatory Policies released by the Reserve Bank of India on October 10, 2025, we have submitted our representation on the draft directions issued thereunder. The submission presents our detailed observations, analysis, and suggestions aimed at facilitating the finalisation of a balanced and practical regulatory framework for Non-Banking Financial Companies (NBFCs).

Our recommendations are intended to support the regulatory objectives of transparency, prudence, and stability, while ensuring operational feasibility for the industry.

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Digi to dizzy highs: Digital gold shines in regulatory dark spot

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– Vinod Kothari & Dayita Kanodia | finserv@vinodkothari.com

An industry report on a digital gold seller website estimates the FY 25 digital gold volume of 25 tons, which is a whopping Rs 30 lakh crores. While that number may be mind-boggling and may be inclusive of other forms of electronic gold (gold ETFs for example), there is no doubt that digital gold, sold on platforms from Paytm to Google Pay, to a wide variety of electronic platforms, has attracted the fancy of crores of investors. Turnover reported on the financials of some of the digital gold sellers[1] is almost 90% in FY 24-25. Looking at these volumes, one may ask – What exactly are the consumers actually buying and who is accountable for all these investments if anything goes wrong?

In this article the author discusses the current regulatory void in which digital gold is surging, and why it is so surprising that SEBI has acquired powers to regulate commodity exchanges, while a regulated digital gold scheme called Electronic Gold Receipts (EGRs) has already been launched under the aegis of that regulatory power.

The golden shine

The love that Indians have for gold doesn’t need elaboration; India is the world’s largest household gold holding country. The Morgan Stanley report that the stock of gold with Indian households may be Rs 336 lakh crores was cited all over. At the same time, the prices of gold have continued to surge.

With gold becoming increasingly unaffordable for a large section of the Indian population, many have turned to digital gold, a concept that allows individuals to invest with amounts as low as ₹100 and own a fraction of the “gold commodity.”

The three major platforms offering digital gold let you buy gold with Re 1, Rs 10 and Rs 100 – whatever infinitesimals fractions of the virtual yellow metal that you want to buy, and these sales have reached dizzy heights. One such digital gold seller reported a FY 24-25 sale of Rs 66230 crores, registering an increase of 89% over the previous year.

Current Regulatory Vacuum: 

The typical search for law about any new instrument would be – which of the existing laws cover a new-age instrument called digital gold? It would be counter-intuitive to expect that laws would always house the provisions for transactions that evolve in a dynamic world. Laws evolve much slower than situations, transactions, dealings, interests or the way people perceive or deal in value or wealth.

However, some of the potential laws would be – is it a “security” under the Securities Contracts Regulation Act? Is it a “deposit” being a financial transaction, and may come under the bar of the Banning of Unregulated Deposit Schemes Act? Given the fact that digital gold is backed, at least supposedly, by a physical gold, is it similar to trading in warehousing receipts under the Warehousing Development and Regulation Act? And so on.

The easiest to dismiss will be the Warehousing law, which was obviously intended for warehouse keeping and transferability of warehousing receipts. It was mostly intended for agricultural commodities. Some metals have also been notified by the WDRA, but gold is not one of them, and for very understandable reasons.

The content about transactions in digital gold being deposit transactions also seems easy to dismiss, at least theoretically, as the intent of a digital gold seller is not to receive money with a promise to return it. In fact, there is nothing to return, as the money has been exchanged for a right over an infinitesimal portion of gold. The digital gold seller makes a purported sale; a sale is not a deposit. The one who sells digital gold is actually selling the gold backing it. But that itself may be fallacy, because a sale requires appropriation and ascertainment of the goods, and given that the transactions in digital gold are for sizes as small as Rs 100, it is unlikely that physical gold of as much quantum would have been separated. So, if it is not appropriation or segregation of the underlying goods, then it may very well be construed as a receipt of money without the transfer of goods, and hence, deposit regulations may be brought in.

Clearly, digital gold is being traded as an investment product, and not as a device to actually take take or give delivery of the gold. Therefore, instinctively, the focus should be on the Securities Contracts (Regulation) Act (SCRA). It is bought and sold in fixed denominations of money; therefore, it also has the optical similarity with a typical financial instrument. If one sees the definition of “securities” under the SCRA, it is an inclusive definition – meaning thereby that the law does not define what a security is, but lists out what securities are covered by the law. Two points – that list itself has continued to expand over time, either because of statutory enlistment of new items, or because of the power granted to Central Govt under sec. 2 (1) (h) (iia).

In 2015, powers to regulate commodity exchanges and commodity derivative transactions were conferred on SEBI, by amending the SCRA. SEBI itself has framed a scheme for Electronic Gold Receipts, discussed below. Hence, dealing with digital gold is not alien to SEBI’s domain. In any case, the Central Govt has the power to notify digital gold as a security.

On 8th Nov., 2025, SEBI issued a press release, less than even the old text form statutory warning cigarette packets, saying that digital gold is unregulated, and investors need to be aware that investor protection mechanisms under securities market purview shall not be available for such digital gold investments. However, what is the reason for the regulators waiting and watching a ballooning market, without a definitive regulatory clarity?

This unregulated nature of digital gold was also highlighted in the case of Nishchay Babu Arkalgud vs Jar Gold Retail Private Limited, wherein the Karnataka High Court observed:

The evolution of digital gold, as a commercial concept, is not in dispute. However, the materials on record disclose that serious allegations are surfaced, including assertions that physical gold could not be traced when demanded, notwithstanding the assurances to the contrary.

Further, several customer complaints about dealings by the digital gold platform were noted as a part of the judgment, such as:

“This app has absolutely no credibility, you keep getting prompts that you’ve saved enough money to buy a gold coin, but every time just before placing order for gold coin, you get a message that gold coin is not deliverable. Also you can’t withdraw the amount you’ve saved, it only allows to withdrawal almost half of the amount. I mean, what even is the point of this application, why wouldn’t anyone just use a savings account? Lost case.”

Such comments are largely because of the unregulated nature of the product.

SEBI imposed ban for stock brokers

Earlier, digital gold was offered not only through digital payment applications but also by stock brokers registered with SEBI. However, under Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), members of a stock exchange are prohibited from engaging in any business other than that of securities or commodity derivatives, except as a broker or agent, and only if such activity does not involve any personal financial liability.

SEBI observed that certain stock brokers were facilitating the buying and selling of digital gold for their clients, an instrument that does not qualify as a ‘security’ under the Securities Contracts (Regulation) Act, 1956 (SCRA). Consequently, through a letter dated August 3, 2021, SEBI informed stock exchanges that such activity violated Rule 8(3)(f) of the SCRR and directed members to refrain from undertaking it.

Pursuant to SEBI’s communication, the NSE issued a circular dated August 10, 2021, instructing its members to discontinue the offering of digital gold and ensure strict compliance with applicable regulations. Members who were engaged in such activities were granted one month to cease facilitating the buying and selling of digital gold on their platforms.

No for stock brokers, but no holds-barred for electronic platforms

SEBI barring its regulated securities intermediaries from dealing in or advising on digital gold did not stop the whole range of other popular public places having millions of hit every day – the e-commerce platforms, payment gateways, wallets or online payment devices. Almost all of them are aligned to some or the other digital gold seller, and permit both buying and selling of digital on or through their platforms.

RBI, has till now maintained silence on such activities, and therefore, several NBFCs have been offering digital gold on their platforms.

The rule is simple – wherever there is a footfall, there is an opportunity to make money by selling digital gold.

In a regulatory blackhole, investors continue to flock to a market where there is least oversight. There is supposedly a deposit of gold, a custodian and trustee mechanism, but nowhere do any of the rules require these custodians or the trustees to be regulated, which, in fact, they are not. In short, even if the existing major players abide by some unwritten self-assumed rules of fair game, there is no entry barrier in the business, nor are there any mechanics of clearing or settlement of trades done on the multitudes of platforms which are now freely selling such digital gold. The scenario, if the past history of unregulated instruments is any indication, is the perfect recipe for an implosion.

As a key principle, wherever someone markets an investment-based product to the public, there is a fiduciary relationship. Which means there is someone on whom investors are putting their trust. Investors can put trustin an eco-system which has regulators, supervisors, capital requirements, mechanics to ensure that the digital paper at no point is less than the real metal behind.  If neither of these are there, how can each regulator keep looking sideways for the other regulator to rise to the occasion?

Creation of a Self-Regulatory Organisation for digital gold

On December 2, 2025, the India Bullion and Jewellers Association (IBJA) announced the establishment of a self-regulatory division for the digital gold industry. This may have been influenced by SEBI’s  warnings (referred above)  to  investors that digital gold products are neither regulated as securities nor as commodity derivatives, with SEBI feigning lack of jurisdiction. 

Among others, the self-regulatory framework has proposed rules on minimum purity,  physical backing, insurance, and segregation of the underlying bullion in addition to consumer Protection rules on clear communication of risks, fees, and a defined grievance redressal mechanism.

Further, IBJA will establish a Digital Gold Transparency Portal to publicly display anonymized, aggregated compliance data and summaries of audit findings.

The final self-regulatory framework is set to be published by March 31, 2026.

The key features of an SRO, essential for its credibility, as pointed out in RBI’s Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs), include the following: 

  • Authority & Governance: Power to set/enforce standards with strong, transparent governance.
  • Rule-making & Oversight: Clear, consultative rules and monitoring of members.
  • Conduct & Discipline: Defined codes with non-monetary penalties (e.g., reprimand, expulsion).
  • Compliance Focus: Promote adherence to Reserve Bank of India regulations.
  • Dispute Resolution: Standardized and transparent mechanisms.
  • Surveillance: Effective monitoring of members and sector.
  • Ecosystem Development: Promote best practices aligned with regulations.

. SROs are, of course, bodies consisting of the industry participants, but in order to be optically and substantively having the right to introduce code of conduct, these bodies need to have leadership that is sufficiently empowered to lay such code. It is the constitution and independence of the SRO that will render it credibility.

In any case, self regulation is not the alibi for lack of regulation – therefore, the author still strongly feels that the instrument has become far too retail-centric and far too popular for the regulators to keep shunning from action. 

Electronic Gold Receipts (EGRs)

While digital gold is currently in a state of regulatory blackhole,SEBI recognises EGRs, a scheme which was launched after a 2023 Budget announcement. Till 2024, SEBI was still  fine tuning the Master Circular, which was issued in June, 2024. This has elaborate mechanism for registered vault managers who store the physical gold against which EGRs are issued, complete with insurance, grievance redressal mechanisms, etc. All of this atypical of a regulated instrument. But given the competition EGRs face from their unleashed brother, EGRs are nowhere in the range of visibility, compared to digital gold.

Concluding Remarks

The volumes of digital gold keep rising while the instrument itself continues to stay in a state of regulatory dark spotwith some warning circulars issued by the SEBI such as the one on Nov 8. However, it lacks any regulatory clarity, any authority which can take accountability if anything goes wrong.

In this prevailing environment for digital gold, every player continues to revel and make money. The digital gold sellers are reporting PAT rises of over 200%; the GST department must be enjoying the 3% GST it charges on the trades, and each of the multiple platforms that facilitate the trades likewise make money. If gold is one of the metals that has least bid-ask spreads, then the question is – where is all this profit, for so many of the players, coming from?

[1] Some of the digital gold sellers are private companies, whose annual reports are not in public domain. Many of the numbers stated in the article are, therefore, based on the financials/other reports on the website of Augmont.

India FSAP 2025: Key Takeaways and Policy Recommendations

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– Chirag Agarwal, Assistant Manager | chirag@vinodkothari.com

A joint World Bank-IMF team visited India in 2024 to update the findings of the Financial Sector Assessment Program (FSAP), which took place in 2017. World Bank on October 30, 2025 released the report1 which summarises the main findings of the mission, identifies key financial development issues, and provides policy recommendations.

We were in touch with the FSA team for our recommendations on certain aspects. The FSA recommendation on leasing (discussed below) is based on our feedback.

This article discusses in brief the key takeaways from the FSA Report.

Key Takeaways:

  1. Stronger and More Diversified Financial System: As per the report, India’s financial system has become more resilient, inclusive, and diversified since the previous 2017 assessment. Non-bank financial institutions (NBFIs) and market financing (other than from banks) now account for 44% of total financial assets—up from 35% in 2017—reflecting deeper financial intermediation beyond banks.
  2. Reforms Critical for India’s 2047 Growth Vision: The report suggests that to achieve the target of a USD 30 trillion economy by 2047, India must modernize its financial architecture to channel both domestic and foreign savings into productive investment, deepen capital markets, and attract long-term infrastructure and green financing2.
  3. Macroprudential Tools: The assessment highlights rising systemic risks due to financial diversification and interlinkages. It recommends expanding data collection and deploying macroprudential tools—including introducing Debt Service to Income (DSTI) limits across banks and NBFCs and building counter-cyclical capital buffers (CCyBs) for banks to manage liquidity, intersectoral contagion, household credit risks, and climate-related financial risks
  4. Regulatory and Supervisory Enhancements: While India’s regulatory oversight framework for banks, insurers, and markets is broadly sound, lingering issues include state influence on regulators, limited powers over governance of state-owned entities, and gaps in conglomerate and climate-risk supervision. The report suggests that efforts should be made to ensure better coordination between regulators and extending the scope of the regulatory and supervisory frameworks.
  5. Banking and NBFC Reforms: The report stresses adoption of IFRS 9, enforcing Pillar 2 capital add-ons, and elimination of prudential exemptions for state-owned NBFCs. It also suggests considering additional liquidity requirements tailored to different business models.
  6. Tax  treatment of leasing: The report suggests that to diversify MSME finance the tax treatment of leasing should be reviewed to ensure an equal treatment between lease and debt transactions. At present, interest on loans is exempted under the GST laws and hence, there is no GST levied on the loan repayments, however, the entire rentals are subject to GST in case of financial leases.
  7. Transfer of oversight function of NHB to RBI: While regulation of HFCs moved to RBI in 2019, supervision still rests with NHB, which follows a limited, compliance-based approach. Shifting supervision to RBI would strengthen oversight and remove the conflict of interest since NHB also acts as promoter and refinancer for HFCs.
  8. MSME Finance: The report recommends integrating TReDs with the e-invoicing portal for automatic invoice uploads. It also suggests incentivizing large buyers and mandating state-owned enterprises to upload invoices to improve cash flow for MSMEs. Further, the report also mentions that SIDBI’s funding support to NBFCs, including NBFC factors, should be increased, along with developing credit enhancement and guarantee facilities for NBFC bonds and MSME loan securitizations.
  1. https://documents1.worldbank.org/curated/en/099103025110514063/pdf/BOSIB-606133f7-2e00-4696-9b41-57f3737d140d.pdf
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  2. See our resources on sustainable financing: https://vinodkothari.com/resources-on-sustainability-finance/  ↩︎

Exempting IFSCA-registered Finance Companies from section 186

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Ayush Kumar – Executive | corplaw@vinodkothari.com

Background:


With a view to promoting ease of doing business for Finance Companies (FCs) operating in the IFSC jurisdiction, the MCA, upon the request of the IFSCA, has vide its notification dated November 3, 2025, extended the exemptions available under section 186 of the Companies Act, 2013, to FCs registered with the IFSCA – similar to those already available to NBFCs registered with the RBI.


Exempted companies – existing exemption list 

Under the existing framework, the following companies were exempted from section 186 (except sub section (1)), if loan given, guarantee made, security in connection with loan given, investment in securities done was in the ordinary course of business of:

  • Banking company
  • Insurance company
  • Housing finance company
  • Registered NBFCs
    • which is in the business of giving loans or providing any guaranty or security for due repayment of any loan 
  • Company established with the object of and engaged in the business of providing infrastructural facilities

Finance Companies registered with IFSCA – added in the exemption list 

Finance Companies are defined under Rule 2(1)(e) of IFSCA (Finance Company) Regulations, 2021. 

  • FCs should be separately incorporated 
  • It is not a Banking Unit registered with IFSCA
  • It deals in permitted activities under Reg 5(1)
  • It cannot accept public deposit from residents / non-residents 

FCs engaged in the following permitted activities (Eligible FCs) are exempted from the applicability of sec 186:

The condition for availing the exemption remains the same as that for NBFCs and other companies i.e the loan / guarantee / security in connection with loan should be extended in the ordinary course of its business.

Related articles:

  1. IFSC Finance Company: Section 186 Compliance Not Required for Routine Financial Activities
  2. Two’s cute, three’s a crowd?
  3. Companies (Amendment) Act, 2017 brings relief under sections 185 and 186

Our resource centre on IFSCA – https://vinodkothari.com/resources-on-ifsca/

IFSC Finance Company: Section 186 Compliance Not Required for Routine Financial Activities

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– Clarification provided in line with exemptions available to NBFCs

– Payal Agarwal, Partner | payal@vinodkothari.com

Section 186 of the Companies Act, 2013 specifies compliance requirements to be followed by a company in granting of loans, making investments, providing guarantee or security to any person or body corporate. For entities engaged in such activities in its “ordinary course of its business”, exemptions are provided through sub-regulation (11) of section 186.

Clause (a) of section 186(11) provides exemption for:

to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

The use of the expression “business of financing industrial enterprises” is explained to include:

  • NBFC which is in the business of giving of any loan to a person or providing any guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business. [existing provision] 
  • Finance Companies registered with IFSCA engaged in eligible permissible activities in its ordinary course of business (read more on Finance Companies here). [inserted vide the Companies (Meetings of Board and its Powers) (Amendment) Rules, 2025 notified on 6th November, 2025 (date of publication in Official Gazette)]

This brief snapshot provides an overview of the amendment:

Our other resources on Section 186 include:

See our Resource Centre on IFSCA here – https://vinodkothari.com/resources-on-ifsca/