Repetitive Overhaul: RPT regime to get softer

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– Team Corplaw | corplaw@vinodkothari.com

SEBI rolls out Consultation Paper: Materiality threshold for RPTs to be scale-based, Industry Standard to get softer, de minimis exemptions

Since 2021, the RPT framework for listed entities has been witnessing repetitive changes, and the current year 2025 has seen SEBI on a regulatory fast track in relation to RPTs.  Be it the launch of RPT Analysis Portal, offering unprecedented visibility into RPT governance data, or the Industry Standards Note (‘ISN’), requiring seemingly a pile of information w.r.t RPTs, both in the month of February, 2025. Originally scheduled to be effective from FY 25, the applicability of ISN was later pushed on to July 1, 2025, and while on the verge of becoming effective, on June 26, 2025, SEBI notified Revised RPT Industry Standards, prescribing tiered but somewhat simplified disclosure formats effective September 1, 2025.

Even before the ISN could become effective, a 32-pager consultation paper proposing further amendments to RPT provisions has been rolled out by SEBI on August 4, 2025.

Based on the “Ease of Doing Business” theme, the Consultation Paper proposes  amendments in the RPT framework, based on recommendations from the Advisory Committee on Listing Obligations and Disclosures (ACLOD). The proposals aim to address practical challenges faced by listed entities while maintaining robust governance standards.

Below we present the proposed amendments and our analysis of the same.

1. Materiality Thresholds: From One-Size-Fits-All to several sizes for short-and-tall

Proposal in CP

A scale-based threshold mechanism is proposed through a new Schedule XII to LODR Regulations, such that the RPT materiality threshold increases with the increase in the turnover of the company, though at a reduced rate, thus leading to an appropriate number of RPTs being categorized as material, thereby reducing the compliance burden of listed entities. The maximum upper ceiling of materiality has been kept at Rs. 5,000 crores, as against the existing absolute threshold of Rs. 1000 crores.

Proposed materiality thresholds:

Annual Consolidated Turnover of listed entity (in Crores)Proposed threshold (as a % of consolidated turnover)Maximum upper ceiling (in Crores)
< Rs.20,00010%2,000
20,001 – 40,0002,000 Crs + 5% above Rs. 20,000 Crs3,000
> 40,0003,000 Crs + 2.5% above Rs. 40,000 Crs5,000 (as proposed)

Back-testing the proposal scale on RPTs undertaken by top 100 NSE companies show a 60% reduction in material RPT approvals for FY 2023-24 and 2024-25 with total no. of such resolutions reducing from 235 and 293, to around 95 to 119. The 60% reduction may itself be seen as a bold admission that the present framework is causing too many proposals to go for shareholder approval.

Historical Benchmark

The absolute threshold of Rs. 1000 crores, for determination of RPTs as material was brought pursuant to an amendment in November 2021, following the recommendations of the Working Group on RPTs. The proposal of WG was based on the data between the years 2015 to 2019, which showed that only around 70 to 91 resolutions were placed for material RPT approvals by the top 500 listed entities.

Our Analysis and Comments

  • Turnover as a single metric is not a measure of materiality: Scale-based tests align materiality with turnover, introducing proportionality, but the question remains whether turnover itself is at all an appropriate yardstick to measure materiality.

Turnover is an inadequate metric for determining the materiality of RPTs. Materiality should reflect the likely financial impact of a transaction, which may have little or no correlation with turnover. For instance, transactions involving investments, asset acquisitions or disposals, or borrowings pertain to the balance sheet rather than the revenue-generating side of operations. Even if an item pertains to revenues, there are businesses where gross profits ratios are low, and therefore, turnover will be high. Globally, jurisdictions like the UK adopt a more nuanced, consonance-based approach [Refer Annex 1 of UKLR 7] using different parameters viz. gross assets test, consideration test, and the gross capital test for different transaction types to ensure relevance and proportionality. Section 188 of the Companies Act, 2013 also adopts a similar multi-metric approach, applying turnover and net worth, depending on the nature of the transaction.

It is also critical to recognise the wide disparity in asset-turnover ratio across industries. A trading company might turn its assets over 20 times annually, while a manufacturing entity with a 90-day working capital cycle may show a turnover approximately four times its assets. On the other hand, entities in the financial sector, such as NBFCs and banks, generate turnover largely through interest income, which is barely 6 to 10 percent of the asset base. Therefore, applying a turnover-based threshold to such entities results in thresholds being disproportionately low when compared to the actual scale of transactions, thereby distorting the materiality assessment.

Given these sectoral variations and the diversity of transaction types, a flat turnover-based threshold oversimplifies the assessment and may result in both overregulation and underreporting. A more calibrated, transaction-specific materiality framework, drawing on consonance-based criteria as seen in Regulation 30 of the LODR Regulations, would offer a more balanced and effective approach. SEBI may consider moving towards such a harmonised model to ensure that materiality thresholds meaningfully reflect the substance of transactions, rather than relying on a single yardstick.

  • Regulatory Lag: It took SEBI almost 4 years, i.e., from 2021 to 2025, to conclude that the threshold of ₹1,000 crores is too small, and that it requires an upward revision, which is now proposed to be increased to ₹5,000 crores. In the context of India’s rapidly growing economy, where turnover figures are expected to rise steadily, even this upwardly revised absolute threshold may soon lose relevance. Frequent threshold shifts risk “chasing” market realities rather than anticipating them. SEBI’s decision to cap at ₹5,000 crore reflects caution but may quickly become outdated.

2. Significant RPTs of Subsidiaries: Plugging Gaps with Dual Thresholds

Existing provisions vis-a-vis Proposal in CP

Pursuant to the amendments in 2021, RPTs exceeding a threshold of 10% of the standalone turnover of the subsidiary are considered as Significant RPTs, thus, requiring approval of the Audit Committee of the listed entity. The CP proposes the following modifications with respect to the thresholds of Significant RPTs of Subsidiaries:

  • ‘Material’ is always ‘Significant’: There may be instances where a transaction by a subsidiary may trigger the materiality threshold for shareholder approval, based on the consolidated turnover of the listed entity, but still fall below the 10% threshold of the subsidiary’s own standalone turnover. As a result, such a transaction would escape the scrutiny of the listed entity’s audit committee. This inconsistency highlights a regulatory gap and reinforces the need to revisit and revise the threshold criteria to ensure comprehensive oversight in a way that aligns with evolving group structures and scale of operations. RPTs of subsidiary would require listed holding company’s audit committee approval if they breach the lower of following limits:
  • 10% of the standalone turnover of the subsidiary or
    • Material RPT thresholds as applicable to listed holding company
  • Exemption for small value RPTs: The threshold for Significant RPTs is subject to an exemption for small value RPTs based on the absolute value of Rs. 1 crore. Thus, where a transaction between a subsidiary and a related party (of the listed entity/ subsidiary), on an aggregate, does not exceed Rs. 1 crore, the same is not required to be placed for approval of the Audit Committee of the listed entity, even if the aforesaid limits are breached.
  • Net Worth Alternative: For newly incorporated subsidiaries which are <1 year old, consequently not having audited financial statements for a period of at least one year, the threshold for Significant RPTs to be determined as below:
  • 10% of standalone net worth of the subsidiary (or share capital + securities premium, if negative net worth),
    • as on a date not more than 3 months prior to seeking AC’s approval
    • certified by a practising CA

Our Analysis and Comments

●      De-minimis exemption for significant RPTs of subsidiaries

The exemption for RPTs up to Rs. 1 crore in absolute terms might provide some relief for the holding entities, particularly, entities having various small subsidiaries, which, on a standalone basis, may not be material for the listed entity at all – however, the RPTs being significant at the subsidiary’s level still required approval of the parent’s audit committee. However, still the exemption threshold may be further enhanced to a higher limit, as a de minimis exemption of Rs. 1 crore entails the subsidiary having a turnover of mere Rs. 10 crores, which, from the perspective of a listed entity is a not a very practically beneficial scenario.

For newly incorporated companies not having a financial track record, linking the significant RPT threshold with net worth brings additional compliance burden in the form of certification requirements from PCA. Net worth alternative introduces valuation and certification burdens for newly incorporated entities, in which case It may be considerable to extend a blanket first year exemption of upto Rs. 5 crore, to balance ease of doing business for newly incorporated subsidiaries, the very decision of which would be stemming from the management of the parent listed entity. In fact, insisting on the net worth certificate itself seems unnecessary, as the net worth is mostly based on paid up capital, which does not warrant certification.

●      Need for easing inclusion of RPs of subsidiaries as RPs of listed entity

First of all, a statement of fact. The number of related parties of listed entities went for a significant explosion in November, 2021, where the definition of RP of a listed entity included RPs of subsidiaries. For any diversified group, there are typically several subsidiaries, each of them with their own independent boards.

While the proposals pertain to significant RPTs of subsidiaries, the most crucial component of the RPT framework lies in identification of RPs, which, under the current framework, covers RPs of subsidiaries as well. These RPs may be, many a times, companies in which the directors of the subsidiaries are holding mere directorships, often, an independent directorship. There is absolutely no scope of conflict of interests in dealing with companies where a person is interested, solely on account of his directorship where there is no direct or indirect shareholding or ownership interest. Such a situation has an explicit carve out under the Ind AS 24 as well, where an entity does not become a RP by the mere reason of having a common director or KMP [Para 11(a) of Ind AS 24]. While the Companies Act treats a company as an RP based on common directorship (in case of a private company), however, the extension of such definition to RPs of subsidiaries is pursuant to the provisions of SEBI LODR and hence, appropriate exclusions may be specified for under LODR.

3. Tiered Disclosures: Balancing Transparency and Burden

Existing provisions vis-a-vis Proposal in CP

The Industry Standards Note on RPTs, effective from 1st September, 2025 provides an exemption from disclosures as per ISN for RPTs aggregating to Rs. 1 crore in a FY. The proposal seeks to provide further relief from the ISN, by introducing a new slab for small-value RPTs aggregating to lower of:

  • 1% of annual consolidated turnover of the listed entity as per the last audited financial statements, or
  • Rs. 10 crore

In such cases, the disclosures are proposed to be given in the Annexure-2 of the Consultation Paper. The disclosure as per the Annexure is in line with the minimum information as is currently required to be placed by the listed entity before its Audit Committee in terms of SEBI Circular dated 22nd November, 2021 (currently subsumed in LODR Master Circular dated November 11, 2024). In the event of the same becoming effective, disclosures would be required in the following manner as per LODR:

Value of transactionDisclosure RequirementsApplicability of ISN
< Rs. 1 croreReg 23(3) of SEBI LODRNA – exempt as per ISN
> Rs 1 crore, but less than 1% of consolidated turnover of listed entity or Rs. 10 crores, whichever is lower (‘Moderate Value RPTs’)Annexure-2 of CP (Paragraph  4  under  Part  A  of  Section  III-B of SEBI Master Circular dated November 11, 2024)Proposed to be exempt from ISN
Other than Moderate Value RPTs but less than Material RPTs (specified transactions)Part A and B of ISNYes
Material RPTs (specified transactions are material)Part A, B and C of ISNYes
Other than Moderate Value RPTs but less than Material RPTs (other than specified transactions)Part A of ISNYes

 Our Analysis and Comments

The proposal would result in creation of multiple reference points with respect to disclosure requirements. As per the existing regulatory requirements, the disclosure requirements before the Audit Committee comes from the following sources:

  • Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 – for listed entities incorporated as a company
  • Reg 23(3)(c) of SEBI LODR – for omnibus approvals
  • SEBI Circular dated 26th June, 2025 read with Industry Standards Note on RPTs – effective from 1st September 2025, for all RPTs other than exempted RPTs (aggregate value of upto Rs. 1 crore)

The proposal leads to an additional classification of RPTs into moderate value RPTs where limited disclosures in terms of the draft Circular will be applicable. While the introduction of differentiated disclosure thresholds aims to rationalise compliance, care must be taken to ensure that the disclosure framework does not become overly template-driven. RPTs, by nature, require contextual judgment, and a uniform disclosure format may not always capture the nuances of each case. It is therefore important that the regulatory design continues to place trust in the informed discretion of the Audit Committee, allowing it the flexibility to seek additional information where necessary, beyond the prescribed formats.

4. Clarification w.r.t. validity of shareholders’ Omnibus Approval

Existing provisions vis-a-vis Proposal in CP

The existing provisions [Para (C)11 of Section III-B of LODR Master Circular] permit the validity of the omnibus approval by shareholders for material RPTs as:

  • From AGM to AGM – in case approval is obtained in an AGM
  • One year – in case approval is obtained in any other general meeting/ postal ballot

A clarification is proposed to be incorporated that the AGM to AGM approval will be valid for a period of not more than 15 months, in alignment with the maximum timeline for calling AGM as per section 96 of the Companies Act.

Further, the provisions, currently a part of the LODR Master Circular, are proposed to be embedded as a part of Reg 23(4) of LODR.

5. Exemptions & Definitions: Pruning Redundancies

Problem Statement

Proviso (e) to Regulation 2(1)(zc) of the SEBI LODR Regulations exempts transactions involving retail purchases by employees from being classified as Related Party Transactions (RPTs), even though employees are not technically classified as related parties. Conversely, it includes transactions involving the relatives of directors and Key Managerial Personnel (KMPs) within its ambit. Additionally, Regulation 23(5)(b) provides an exemption from audit committee and shareholder approvals for transactions between a holding company and its wholly owned subsidiary. However, the term “holding company” used in this context has remained undefined, leaving ambiguity as to whether it refers only to a listed holding company or includes unlisted ones as well.

Proposal in CP

The Consultation Paper proposes two key clarifications:

  1. The exemption related to retail transactions should be expressly limited to related parties (i.e., directors, KMPs, or their relatives) to grant the appropriate exemption.
  2. The exemption for transactions with wholly owned subsidiaries should apply only where the holding company is also a listed entity, thereby excluding unlisted holding structures from this relaxation

Our Analysis and Comments

Under the existing framework, retail purchases made on the same terms as applicable to all employees are exempt when undertaken by employees, but not when made by relatives of directors or KMPs. This has led to an inconsistent treatment, where similarly situated individuals receive different regulatory treatment solely on the basis of their relationship with the company. The proposed language attempts to streamline this by including such relatives within the exemption, but it introduces its own drafting concern.

  • The phrasing – “retail purchases from any listed entity or its subsidiary by its directors or its employees key managerial personnel(s) or their relatives, without establishing a business relationship and at the terms which are uniformly applicable/offered to all employees and directors and key managerial personnel(s)” – creates a potential loophole. As worded, the exemption could be interpreted to cover purchases made on favourable terms offered to directors or KMPs themselves, rather than being benchmarked against terms applicable to employees at large. The intended spirit of the provision seems to be to exempt only those transactions where the terms are genuinely uniform and non-preferential. A more appropriate construction would make it clear that the exemption is intended to apply only where such transactions mirror employee-level retail transactions, not privileged arrangements for senior management.
  • Regarding the exemption under Regulation 23(5)(b) for transactions between a holding company and its wholly owned subsidiary, this clarification seeks to align the treatment under Regulations 23(5)(b) and 23(5)(c). While this provides helpful interpretational guidance, incorporating the word “listed” directly into the text of the Regulation itself could offer greater precision and eliminate the need for retrospective explanations. Since unlisted holding companies are not subject to LODR, they are unlikely to have interpreted the exemption as applicable in the first place. As such, a simple prospective clarification might serve the purpose more effectively.

Conclusion

SEBI’s August 2025 proposals are largely aimed at relaxation, though in some cases, the ability to think beyond the existing track of the law seems missing. With the new leadership at SEBI meant to rationalise regulations, it was quite an appropriate occasion to do so. However, at many places, the August 2025 proposals are simply making tinkering changes in 2021 amendments and fine-tuning the June 2025 ISN. In sum, SEBI’s iterative approach to RPT governance demonstrates commendable responsiveness but calls for a holistic RPT policy road-map, harmonizing LODR regulations, circulars, and guidelines. Only a forward-looking, principles-based framework, will deliver the twin objectives of ease of doing business and investor protection in the long run.

Read More:

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

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

Related Party Transactions- Resource Centre

Round-Tripping Reined: RBI Rolls Out Relaxed Rules for Investments in AIFs

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-Sikha Bansal, Senior Associate & Harshita Malik, Executive | finserv@vinodkothari.com

Background

The RBI’s regulatory approach to investments by Regulated Entities (REs) in Alternate Investment Funds (AIFs) has undergone a remarkable transformation over the past two years. Initially, the RBI responded to the risks of “evergreening”, where banks and NBFCs could mask bad loans by routing fresh funds to existing debtor companies via AIF structures, by issuing stringent circulars in December 20231 and March 20242 (collectively known as ‘Previous Circulars’). The December 2023 circular imposed a blanket ban on RE investments in AIFs that had downstream exposures to debtor companies, while the March 2024 clarification excluded pure equity investments (not hybrid ones) from this restriction. This stance aimed to strengthen asset quality but quickly highlighted significant operational and market challenges for institutional investors and the AIF ecosystem. Many leading banks took significant provisioning losses, as the Circulars required lenders to dispose off the AIF investments; clearly, there was no such secondary market. 

In response to the feedback from the financial sector, as well as evolving oversight by other regulators like SEBI, the RBI undertook a comprehensive review of its framework and issued Draft Directions- Investment by Regulated Entities in Alternate Investment Funds (‘Draft Directions’) on May 19, 20253. The Draft Directions have now been finalised as Reserve Bank of India (Investment in AIF) Directions, 2025 (‘Final Directions’) on 29th May, 2025. The Final Directions shift away from outright prohibitions and instead introduce a carefully balanced regime of prudential limits, targeted provisioning requirements, and enhanced governance standards. 

Comparison at a Glance

A compressed comparison between Previous Circulars and Final Directions is as follows –

ParticularsPrevious CircularsFinal DirectionsIntent/Implication
Blanket BanBlanket ban on RE investments in AIFs lending to debtor companies (except equity)No outright ban; investments allowed with limits, provisioning, and other prudential controlsMove from a complete prohibition to a limit-based regime. Max. Exposures as defined (see below) taken as prudential limits
Definition of debtor companyOnly equity shares excluded for the purpose of reckoning “investment” exposure of RE in the debtor companyEquity shares, CCPSs, CCDs (collectively, equity instruments) excluded Therefore, if RE has made investments in convertible equity, it will be considered as an investment exposure in the counterparty – thereby, the directions become inapplicable in all such cases.
Individual Investment Limit in any AIF schemeNot applicable (ban in place)Max 10% of AIF corpus by a single RE, subject to a max. of 5% in case of an AIF, which has downstream investments in a debtor company of RE.Controls individual exposure risk. Lower threshold in cases where AIF has downstream investments.
Collective Investment Limit by all REs in any AIF schemeNot applicableMax 20%4 of AIF corpus across all REsWould require monitoring at the scheme level itself.
Downstream investments by AIF in the nature of equity or convertible equityEquity shares were excluded, but hybrid instruments were not. All equity instruments Exclusions from downstream investments widened to include convertible equity as well. Therefore, if the scheme has invested in any equity instruments of the debtor company, the Circular does not hit the RE.
Provisioning100% provisioning to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme or 30-day liquidation, if breachIf >5% in AIF with exposure to debtor, 100% provision on look-through exposure, capped at RE’s direct exposure5 (see illustrations below)No impact vis-a-vis Previous Circulars. 
For provisioning requirements, see illustrations later. 
Subordinated Units/CapitalEqual Tier I/II deduction for subordinated units with a priority distribution modelEntire investment deducted proportionately from Tier 1 and Tier 2 capital proportionatelyAdjustments from Tier I and II, now to be done proportionately, instead of equally. 
Investment PolicyNot emphasizedMandatory board-approved6 investment policy for AIF investmentsOne of the actionables on the part of REs – their investment policies should now have suitable provisions around investments in AIFs keeping in view provisions of these Directions
ExemptionsNo specific exemption. However, Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds were excluded from the scope of circulars. Prior RBI-approved investments exempt; Government notified AIFs may be exempt
Provides operational flexibility and recognizes pre-approved or strategic investments.No specific mention of investments through MFs/FoFs – however, given the nature of these funds, we are of the view that such exclusion would continue.
Transition/Legacy TreatmentNot applicableLegacy investments may choose to follow old or new rulesSee discussion later.

Key Takeaways: 

Detailed analysis on certain aspects of the Final Directions is as follows:

Prudential Limits 

Under the Previous Circulars, any downstream exposure by an AIF to a regulated entity’s debtor company, regardless of size, triggered a blanket prohibition on RE investments. The Final Directions replace this blanket ban with prudential limits:

  • 10% Individual Limit: No single RE can invest more than 10% of any AIF scheme’s corpus.
  • 20% Collective Limit: All REs combined cannot exceed 20% of any AIF scheme’s corpus; and
  • 5% Specific Limit: Special provisioning requirements apply when an RE’s investment exceeds 5% of an AIF’s corpus, which has made downstream investments in a debtor company.

Therefore, if an AIF has existing investments in a debtor company (which has loan/investment exposures from an RE), the RE cannot invest more than 5% in the scheme. But what happens in a scenario where RE already has a 10% exposure in an AIF and the AIF does a downstream investment (in forms other than equity instruments) in a debtor company? Practically speaking, AIF cannot ask every time it invests in a company whether a particular RE has exposure to that company or not. In such a case, as a consequence of such downstream investment, RE may either have to liquidate its investments, or make provisioning in accordance with the Final Directions. Hence, in practice, given the complexities involved, it appears that REs will have to conservatively keep AIF stakes at or below 5% to avoid the consequences as above. 

Now, consider a scenario – where the investee AIF invests in a company (which is not a debtor company of RE), which in turn, invests in the debtor company. Will the restrictions still apply? In our view, it is a well-established principle that substance prevails over form. If a clear nexus could be established between two transactions – first being investment by AIF in the intermediate company, and second being routing of funds from intermediate company to debtor company, it would clearly tantamount to circumventing the provisions. Hence, the provisioning norms would still kick-in. 

Provisioning Requirements

Coming to the provisioning part, the Final Directions require REs to make 100 per cent provision to the extent of its proportionate investment in the debtor company through the AIF Scheme, subject to a maximum of its direct loan and/ or investment exposure to the debtor company, if the REs exposure to an AIF exceeds 5% and that AIF has exposure to its debtor company. The requirement is quite obvious – RE cannot be required to create provisioning in its books more than the exposure on the debtor company as it stands in the RE’s books. 

The provisioning requirements can be understood with the help of the following illustrations:

ScenarioIllustrationExtent of provisioning required
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure exists as on date or in the past 12 months)For example, an RE has a loan exposure of 10 cr on a debtor company and the RE makes an investment of 60 cr in an AIF (which has a corpus of 800 cr), the RE’s share in the corpus of the AIF turns out to be 7.5%. The AIF further invested 200 cr in the debtor company of the RE. The proportionate share of the RE in the investment of AIF in the debtor company comes out to be 15 cr (7.5% of 200 cr). However, the RE’s loan exposure is 10 crores only. Therefore, provisioning is required to the extent of Rs. 10 crores.
Existing investment of RE in AIF Scheme (direct loan and/or investment exposure does not exist as on date or in the past 12 months)Facts being same as above, in such a scenario, the provisioning requirement shall be minimum of the following two:-15 cr(full provisioning of the proportionate exposure); or-0 (full provisioning subject to the REs direct loan exposure in the debtor company)Therefore, if direct exposure=0, then the minimum=0 and hence no requirement to create provision.

Some possible measures which REs can adopt to ensure compliance are as follows: 

  1. Maintain an up-to-date, board-approved AIF investment policy aligned with both RBI and SEBI rules;
  2. Implement robust internal systems for real-time tracking of all AIF investments and debtor exposures (including the 12-month history);
  3. Require regular, detailed portfolio disclosures from AIF managers;
  4. appropriate monitoring and automated alerts for nearing the 5%/10%/20% thresholds; and
  5. Establish suitable escalation procedures for potential breaches or ambiguities.

Further, it shall be noted that the intent is NOT to bar REs from ever investing more than 5% in AIFs. The cap is soft, provisioning is only required if there is a debtor company overlap. But the practical effect is, unless AIFs develop robust real-time reporting/disclosure and REs set up systems to track (and predict) debtor overlap, 5% becomes a limit for specifically the large-scale REs for practical purposes. 

Investment Policy

The Final Directions call for framing and implementing an investment policy (amending if already exists) which shall have suitable provisions governing its investments in an AIF Scheme, compliant with extant law and regulations. Para 5 of the Final Directions does not mandate board approval of that policy, however, Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. In light of this broader governance requirement, it is our view that an RE’s AIF investment policy should similarly receive Board approval. Below is a tentative list of key elements to be included in the investment policy:

  • Limits: 10% individual, 20% collective, with 5% threshold alerts;
  • Provision for real-time 12-month debtor-exposure monitoring and pre-investment checks;
  • Clear provisioning methodology: 100% look-through at >5%, capped by direct exposure; proportional Tier-1/Tier-2 deduction for subordinated units; and
  • Approval procedures for making/continuing with AIF investments; decision-making process
  • Applicability of the provisions of these Directions on investments made pursuant to commitments existing on or before the effective date of these Directions.

Subordinated Units Treatment

Under the Final Directions, investments by REs in the subordinated units7 of any AIF scheme must now be fully deducted from their capital funds, proportionately from Tier I and Tier II as against equal deduction under the Previous Circulars. While the March 2024 Circular clarified that reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; the same has not been clarified under the Final Directions. However, the scope remains the same in our view.

What happens to positions that already exist when the Final Directions arrive?

As regards effective date, Final Directions shall come into effect from January 1, 2026 or any such earlier date as may be decided as per their internal policy by the REs. 

Although, under the Final Directions, the Previous Circulars are formally repealed, the Final Directions has prescribed the following transition mechanism:

Time of making Investments by RE in AIFPermissible treatment under Final Directions
New commitments (post-effective date)Must comply with the new directions; no grandfathering or mixed approaches allowed
Existing InvestmentsWhere past commitments fully honoured: Continue under old circulars
Partially drawn commitments: One-time choice between old and new regimes

Closing Remarks

The RBI’s evolution from blanket prohibitions to calibrated risk-based oversight in AIF investments represents a mature regulatory approach that balances systemic stability with market development, and provides for enhanced governance standards while maintaining robust safeguards against evergreening and regulatory arbitrage. 

Of course, there would be certain unavoidable side-effects, e.g. significant operational and compliance burdens on REs, requiring sophisticated real-time monitoring systems, comprehensive debtor exposure tracking, board-approved investment policies, and enhanced coordination with AIF managers. Hence, there can be some challenges to practical implementation.  Further, the success of this recalibrated regime will largely depend on the operational readiness of both REs and AIFs to develop transparent monitoring systems and proactive compliance frameworks. 

  1.  https://vinodkothari.com/2023/12/rbi-bars-lenders-investments-in-aifs-investing-in-their-borrowers/ 
    ↩︎
  2.  https://vinodkothari.com/2024/03/some-relief-in-rbi-stance-on-lenders-round-tripping-investments-in-aifs/ 
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  3.  https://vinodkothari.com/2025/05/capital-subject-to-caps-rbi-relaxes-norms-for-investment-by-res-in-aifs-subject-to-threshold-limits/ ↩︎
  4.  The limit was 15% in the Draft Directions, the Final Directions increased the limit by 5 percentage points.
    ↩︎
  5.  This cap at RE’s direct loan and/or investment exposure has been introduced in the Final Directions.
    ↩︎
  6.  Para 29 of the RBI’s Master Directions on Scale Based Regulations stipulates that any investment policy must be formally approved by the Board. 
    ↩︎
  7. SEBI, vide Master Circular for AIFs, had put restrictions on priority distribution model. Later, pursuant to Fifth Amendment to SEBI (AIF) Regulations, 2024, SEBI issued a Circular dated December 13, 2024 wherein certain exemptions were allowed and differential rights were allowed subject to certain conditions. See our article here. ↩︎

Webinar on Demystifying Promoter & Promoter Group Puzzle

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Let them pledge but don’t make it count: RBI’s clarification on voluntary pledge

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Harshita Malik | finserv@vinodkothari.com

The Banking Puzzle

I was giving a collateral-free loan only, but the borrower didn’t agree – he voluntarily came and pledged family gold and silver jewellery! 

This is perhaps the way Banks will be reacting after the RBI Clarificatory circular on Voluntary Pledge of Gold (‘Voluntary Pledge Circular’). The Voluntary Pledge Circular dated July 11, 2025 which addresses all Scheduled Commercial Banks (including RRBs & SFBs), State Co-operative Banks, District Central Co-operative Banks states that a a voluntary pledge of gold or silver as collateral by a borrower for an agricultural or MSME loan shall not amount to a violation of the Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 (‘Gold Lending Directions’), provided that the sanctioned amount is within the collateral-free limit laid down in the earlier RBI guidelines. 

It may be noted that as per separate RBI circulars dated December 6, 2024 and July 24, 2017 farm lending upto Rs. 2 lacs and MSE lending upto Rs. 10 lacs shall be done without collateral.

This clarification by the regulator may enable lenders to circumvent the regulations by categorizing collateral as a voluntary pledge for loans within the collateral-free caps, whereas in reality, the borrower may have been directly or indirectly compelled to offer such collateral.

Further, the circular also makes reference to the Gold Lending Directions. A question may arise if the Gold Lending Directions will apply even in the case of voluntary pledge of gold. 

The Gold Lending Directions should apply in all such cases of voluntary pledges to avoid a situation of regulatory arbitrage, where lenders could potentially bypass regulatory guidelines merely by categorizing the pledge as voluntary.

Our resources on the topic- 

  1. Bank-NBFC Partnerships for Priority Sector Lending: Impact of New Directions – Vinod Kothari Consultants
  2. RBI revises Priority Sector Lending Norms
  3. Meeting priority sector lending shortfalls: One more option
  4. PSL guidelines reviewed for wider credit penetration
  5. The new PSL Master Direction and its Impact on NBFCs

Overview of RBI (Project Finance) Directions, 2025

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Link to the YouTube video – https://www.youtube.com/watch?v=uCbe66Amk9w

Our article on the RBI (Project Finance) Directions, 2025

Presentation on Project Finance.pptxDownload

An Overview of GST Implications on Lease Transactions

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Yuttika Dalmia | finserv@vinodkothari.com

Introduction

Is Lease covered under GST?

Classification of Lease under GST: Supply of Goods or Services?

Application of Goods-Equivalent GST Rates on Leasing Services

Leasing under GST as Mixed and Composite Supply

Should CGST +SGST or IGST be charged on the supply ?

Point of Taxation

Input Tax Credit

Input Service Distributor

GST Rates

Conclusion

Introduction

In today’s dynamic business environment, leasing has emerged as a powerful financial strategy, allowing companies to access capital assets without significant upfront capital investment. While traditional forms of funding such as equity and loans serve to inject owned or borrowed capital into a business, leasing offers rented capital which enables operational agility with reduced financial commitment. For businesses aiming to streamline their operations and be future-ready, leasing is the smart way forward.

Under the GST framework, leasing is unequivocally classified as a supply of service, irrespective of whether the lease relates to movable or immovable property. Under accounting parlance, Leasing is classified into two categories: financial lease and operating lease. These classifications are based on the extent to which risks and rewards of ownership are transferred from the lessor to the lessee.

GST implications on leasing are governed by specific provisions relating to nature of supply, place of supply, time of supply, utilization of input tax credit and applicable tax rates. Understanding these is critical for lessors and lessees alike to ensure compliance, proper tax treatment , and optimal input tax credit  management.

This note presents an overview of the GST framework applicable to leasing transactions.

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“Immediate relatives” and not “relatives” for determining promoter group

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Limiting the ever expanding scope of PG by excluding children-in-law

Nitu Poddar, Partner | Nitu@vinodkothari.com

The definition of “promoter-group” in ICDR Regulations, though longstanding, has been into the highlights lately post the SEBI FAQ dated April 25, 2025 which have reiterated the provisions of Reg 31(4) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) requiring the listed companies to provide the list of all promoter / promoter group (‘P/ PGs’) in the shareholding pattern (‘SHP’) irrespective the shareholding in the company. 

While India Inc is still struggling with the practicality of collating the list of PGs arising from spouse-side immediate relatives and entities controlled by them, another practical issue to be fixed in the definition is the use of the term “relative” in the context of HUFs and firms

Issue – Overreach of the definition of “relatives” 

Item A and C of Reg 2(1)(pp)(iv) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’) pulls in the following entities in the PG list:

  • Body corporates in which HUFs and Firms – in which the “relatives” of promoters are members – hold ≥ 20% of equity share capital. 
  • Any body corporate in which such body corporate (as described above) holds  ≥ 20% of equity share capital.
  • HUFs and Firms where the “relatives” of promoters are holding ≥ 20% of total capital.

The key concern arises from the definition of “relatives” as per section 2(77) of Companies Act, 2013 which is wider than the definition of “immediate relatives” as per reg 2(1)(pp)(ii) of ICDR Regulations. 

  • The former includes spouses of the children (bahu and damad) who are not included in the definition of immediate relatives. 
  • Also, all the co-parcerners of an HUF are relatives u/s section 2(77) of Companies Act, 2013.

Consequence – Looping in non-PG entities as PG

This results in the inclusion of HUFs or firms where children-in-law or extended relatives are  holding ≥  20% of total capital as PG – even though these individuals (children-in-law) are not themselves promoters or immediate relatives under the ICDR framework.

Such interpretations expand the promoter group to cover entities indirectly connected through individuals not formally recognized as part of the promoter group, creating ambiguity in the definition.

Sensible interpretation – aligning with immediate relatives

To make sense of each clause of the definition of PG, in our view, the word “relative” in clause Item A and C of Reg 2(1)(pp)(iv) should be limited to “immediate relatives” as defined in sub-clause (ii) of reg. 2(1)(pp) of ICDR Regulations.

May refer to our related resource on the subject matter below:

Paradox of privacy

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Whether private NBFCs-ML are required to appoint IDs?

– Neha Malu, Associate | finserv@vinodkothari.com

Independent directors have long been regarded as critical instruments of corporate governance. They bring fresh perspectives, specialized knowledge and most importantly, an element of unbiased oversight to board deliberations. Think of them as neutral referees who ensure fair play in business operations and uphold the integrity of boardroom decisions. Their presence helps reduce conflicts of interest, curb excessive promoter influence and encourage more balanced and professionally informed decision-making.

Under the Companies Act, 2013, section 149 read with rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 lays down the categories of companies that are mandatorily required to appoint independent directors[1]. These categories do not include private companies. The rationale is intuitive: private companies, by their very nature of being closely held, are presumed to function under greater internal control, thereby reducing the perceived need for external board oversight. The whole basis of “privacy” of a private company will be frustrated if there are independent persons on its board.

Further, wholly owned subsidiaries are explicitly exempted from the requirement to appoint independent directors under rule 4(2), regardless of their nature or size.

And accordingly, a point of regulatory discussion arises in the case of (i) private NBFCs and (ii) NBFCs that are wholly owned subsidiaries, classified in the middle layer or above under the SBR Master Directions. While the Companies Act, 2013 does not mandate the appointment of independent directors for private companies and explicitly exempts WOS from such requirement, the corporate governance provisions under the SBR Master Directions require the constitution of certain committees, the composition of which hints towards the presence of independent directors.

This gives rise to a key question: Does a private NBFC or a wholly owned subsidiary, solely by virtue of its classification under the middle layer or above, become subject to an obligation to appoint independent directors?

Committees for NBFC-ML and above, the composition of which includes IDs

Upon classification as an NBFC-ML or above, conformity with corporate governance standards becomes applicable. Below we discuss specifically about the committees, the composition of which also includes IDs:

Name of the CommitteeCompositionRemarks
Audit Committee [Para 94.1 of the SBR Master Directions]Audit Committee, consisting of not less than three members of its Board of Directors. If an NBFC is required to constitute AC under section 177 of the Companies Act, 2013, the Committee so constituted shall be treated as the AC for the purpose of this para 94.1.As per section 177, an AC shall comprise a minimum of  three directors, with Independent Directors forming a majority. Hence, in case the NBFC is not covered under the provisions of section 177, the same may be constituted with any three directors, not necessarily being independent directors.
Nomination and Remuneration Committee [Para 94.2 of the SBR Master Directions]Composition will be as per section 178 of the Companies Act, 2013.The provisions indicate that the NRC shall have the constitution, powers, functions and duties as laid down in section 178. In this context, Companies Act requires every NRC to consist of at least three non-executive directors, out of which not less than one-half should be independent directors.
IT Strategy Committee [Para 6 of the Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices]The Committee shall be a Board-level IT Strategy Committee (a) Minimum of three directors as members (b) The Chairperson of the ITSC shall be an independent director and have substantial IT expertise in managing/ guiding information technology initiatives (c) Members are technically competent (d) CISO and Head of IT to be permanent inviteeChairperson of the Committee is required to be an ID.
Review Committee [Master Direction on Treatment of Wilful Defaulters and Large Defaulters]The Composition of the Committee shall be as follows: The MD/ CEO as chairperson; and Two independent directors or non-executive directors or equivalent officials serving as members.Where the NBFC has not appointed IDs, NEDs or equivalent officials to serve as members of the Committee.

Divergent Market Practices

With respect to appointment of IDs on the Board and induction in the Committees, two interpretations are seen in practice in the case of private companies and WOS:

First, since the Companies Act does not mandate the appointment of independent directors in the case of private companies and explicitly exempts WOS, private NBFCs and WOS often rely on these statutory exemptions. The SBR Master Directions make a general reference to the Companies Act without distinguishing between company categories, which further supports the view that these entities constitute the relevant committees without appointing independent directors.

Second, given that NBFCs in the middle layer or above have crossed the ₹1,000 crore asset threshold and fall under enhanced regulatory scrutiny, some take the view that such entities should align with the intended governance standards and appoint independent directors, even if not required under the Companies Act.

Closing thoughts

The SBR Framework takes into account the systemic concerns associated with different NBFCs and thus classifies them into different layers. The corporate governance norms are applicable to ML, UL and TL NBFCs, which, given their asset sizes, are expected to operate at huge volumes and carry a great magnitude of risks. Such NBFCs may have access to public funds (by way of bank borrowings, debenture issuance etc.), wherein large lenders or public would have exposures and consequent high systemic risks. Hence, looking at the constitution (that is whether the NBFC is a private limited or public limited) becomes less important, and looking at the size, activity and function becomes more important. 

Thus, it may not be right to conclude that NBFCs registered as private companies and WOS can do away with the mandatory composition prescriptions merely due to the constitutional form of their entity. Looking at the intent and idea of SBR Framework, the applicable NBFCs may be required to appoint independent directors irrespective of the form of their constitution. The scale-based regulation emanates from the idea that NBFCs having high risk should be effectively monitored. Thus, the regulations should be followed in spirit to effectively mitigate the risks arising in the course of the NBFC’s functioning.

[1] Pursuant to the provisions of section 149(4) of the Companies Act read with rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, following companies are mandatorily required to appoint independent directions: listed companies, public companies having paid up share capital of ten crore rupees or more; or turnover of one hundred crore rupees or more; or having in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees as per the latest audited financial statements.

Read more:

What is a non-banking financial company?
Resources on Scale Based Regulations

More Than Enough: Overcollateralisation as credit enhancement in Securitisations 

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Vinod Kothari, Dayita Kanodia and Archisman Bhattacharjee | finserv@vinodkothari.com

Overcollateralisation (OC) is a widely employed credit enhancement technique in securitisation transactions, serving as a layer of protection for investors. In essence, it refers to a situation where the value of the underlying asset pool exceeds the amount of the liabilities, that is, the securities issued. 

A simple illustration of OC is as follows: 

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