Register here: https://forms.gle/Ymzo9Zxv92JNTowW6
Related Party Transactions- Resource Centre
12 hours Certificate Course on Nuts and Bolts of Related Party Transactions
Tailored to Fit Practically: Disclosure for RPTs under Revised Industry Standards
FAQs on Standards for minimum information to be disclosed for RPT approval
– Pammy Jaiswal and Sourish Kundu | corplaw@vinodkothari.com
The presentation of the profit and loss account has been outlined under the Schedule III of the Companies Act, 2013 (‘Act’) and the profit computation method has been provided for under the applicable accounting standards [See IND AS 1]. The basic principle is to showcase a true and fair view of the financial position of a company. Having said that, it is also significant to mention that the Act provides for an alternative method for computing net profits, the basic intent of which is to arrive at an adjusted net profit which does not have elements of unrealised gains or losses, capital gains or losses and in fact any item which is extraordinary in its very nature. The same is contained under the provisions of section 198 of the Act. This section, unlike the general computation method, has a limited objective i.e., calculation of net profits for managerial remuneration as well as corporate social responsibility.
There are four operating sub-sections under section 198 which provides for the adjustment items:
It is important to note that items other than those mentioned above need not be specifically adjusted unless their nature calls for adjustment under the said section. Now if we discuss specifically for items in the nature of Expected Credit Loss (‘ECL’) for companies following IND AS, it is important to understand the nature of ECL in the context of making adjustments under section 198 of the Act. See our write on Expected Credit Losses on Loans: Guide for NBFCs.
Reference shall be drawn from Ind AS 109 which defines ‘credit loss’ as ‘the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e. cash shortfalls), including cash flows from the sale of collateral held.’ ECL is essentially a way of estimating future credit losses, even on loans that appear to be fully performing at the time of such analysis (Stage 1 assets). It is based on expected delays or defaults, and the estimated loss is recorded as a charge to the profit and loss account, based on a 12-month probability of default.
As per Ind AS 109, ECL is used for the recognition and measurement of impairment on financial assets both at the time of origination as well as at the end of every reporting period. ECL is a forward-looking approach that requires entities to recognize credit losses based on the probability of future defaults/ delays.
However, this does not result in a reduction in the carrying value of the asset (unless the asset is already credit-impaired, i.e., Stage 3). In that sense, while ECL reflects asset impairment, it does not operate like a direct write-down. And unlike conventional provisioning, ECL is not a “provision” under traditional accounting – it is a loss allowance rooted in forward-looking estimations. Further, it is also important to understand that the booking of ECL does not mean that there has been a credit loss in the actual sense, the same is a methodical manner of estimating the probable default risk association with the asset value.
Section 198 requires excluding unrealised or notional adjustments, such as fair value changes or revaluation impacts in terms of Section 198(3) of theAct.
The section also refers specifically to actual bad debts, under Section 198(4)(o). This raises the natural interpretational question: should model-driven, probability-weighted ECL charges – which do not reflect realised losses – really be allowed to remain deducted while computing such customised profits? Well, the answer lies in the requirement and nature of such an item being required to be deducted from the profit and loss account under IND AS 109.
The question around the treatment of ECL can be viewed from two perspectives. The first being the nature of ECL and the second on the routine treatment and calculation of ECL. If we look at the nature, it is clear that while it is imperative for companies to compute ECL at the time of origination as well as at the end of every reporting period, it is important to note that there is no loss or default in the actual sense. This means that the amount computed as ECL has not been an actual default.
On the other hand, if we look at the need for such computation and the methodical approach to arrive at the value of ECL, the same is likely to be considered as a usual working charge which is charged to the profit and loss account. Accordingly, we have come across two possible and permissible approaches to the treatment of ECL while computing the profits under section 198. The same has been discussed below with the help of illustrations.
Approach 1: Disallowing ECL in the year of its booking and subsequent adjustment of bad debt
| Year 1 | Year 2 |
| PBT – 1000 Depreciation – 20 ECL – 40 Loss on sale of fixed asset – 15 | PBT – 1200 Depreciation – 20 ECL – 35 Actual Bad Debt – 15 Profit on sale of equity shares – 25 |
| Year 1 | Amount | Year 2 | Amount |
| PBT | 1000 | PBT | 1200 |
| Depreciation | – | Depreciation | – |
| Add: ECL | 40 | Add: ECL | 35 |
| Add: Loss on sale of fixed asset | 15 | Less: Profit on sale of equity shares | (25) |
| PBT u/s 198 | 1055 | PBT u/s 198 | 1210 |
Notes:
Approach 2: Allowing ECL in profit computation and netting off actual bad debt from the same in subsequent period
| Year 1 | Year 2 |
| PBT – 1000 Depreciation – 20 ECL – 40 Loss on sale of fixed asset – 15 | PBT – 1200 Depreciation – 20 ECL recovered – 35 Actual Bad Debt – 15 Profit on sale of equity shares – 25 |
| Year 1 | Amount | Year 2 | Amount |
| PBT | 1000 | PBT | 1200 |
| Depreciation | – | Depreciation | – |
| ECL | – | ECL | – |
| Add: Loss on sale of fixed asset | 15 | Actual bad debt | – |
| ECL recovered | – | ||
| Less: Profit on sale of equity shares | (25) | ||
| PBT u/s 198 | 1015 | PBT u/s 198 | 1185 |
Notes:
All listed companies are required to comply with Ind AS and given that an instance of a company having nil receivables is a rare occurrence, the discussion on how ECL is to be treated while computing net profit in terms of Section 198 becomes more than just an academic debate.
As long as the impact of any P&L item being extra ordinary in nature is taken off from the profits computed u/s 198, the same serves the purpose and intent of section 198 of the Act. ECL, while valid for accounting, is fundamentally an estimated, non-actual loss. It exists because accounting standards demand alignment of income with credit risk and not because a real outflow has occurred. However, it cannot be said that ECL already deducted while calculating profit before tax as per applicable accounting standards will be reversed while calculating profits in terms of Section 198.
Further, given that ECL is based on expectation calculated using due accounting principles, the actual bed debt, if within the ECL limit, does not impact the P&L. On the contrary, in case of the actual bad debt being in excess, the P&L warrants a subsequent debit of the net amount. For example, under approach 2 if the actual bad debt would have been 50, i.e. in excess of the ECL booked in the previous period by 10, the normal profit computation would have allowed a debit of 10.
In fact, both the approaches lead to the fulfilment of the intent of section 198 and hence, it is not necessary to consider any one approach as correct. Having said that, it is imperative to follow uniform practice in this regard in the absence of which the profits u/s 198 may be impacted.
Therefore, where the statutory and accounting frameworks intersect – but are not necessarily aligned – companies must adopt a carefully considered, principle-based approach as even a single line item like ECL can materially influence the base for managerial remuneration and CSR spending unlike other estimate based items such as revenue deferrals viz. sales returns or warranties, which are made as a matter of accounting prudence, but does not represent outflows for statutory computation purposes. Accordingly, there is no reason for deviating from the Indian GAAP principles for the purpose of customised calculation of net profits for specific purposes.
Read more:
Cash in Hand, But Still a Loss?
Team Corplaw | corplaw@vinodkothari.com
| Approval of AC | Approval of shareholders (in case of material RPTs) | Date of execution of RPTs | Applicability of RPT ISN |
| Before Effective Date | Before Effective Date | After Effective Date | Not Applicable |
| Before Effective Date | After Effective Date | After Effective Date | Not Applicable |
| After Effective Date | After Effective Date | After Effective Date | Applicable |
Our analysis of the detailed disclosure requirements on relevant line-items are being collated in the form of FAQs. Keep checking our website for more.
– Sikha Bansal, Senior Partner and Simrat Singh, Senior Executive | corplaw@vinodkothari.com
The right of a shareholder to receive dividends is conferred under Section 123(5) of the Companies Act, 2013 (‘CA, 2013’). The corresponding obligations on the company are elaborated in Chapter VIII of the Act (Sections 123 to 127), read with the Companies (Declaration and Payment of Dividend) Rules, 2014. For listed companies, Regulations 42 and 43 of the Listing Regulations, 2015 further prescribe a few procedural requirements for declaration and payment of dividend.
However, neither the CA, 2013 nor the Listing Regulations, 2015 recognise a shareholder’s unilateral right to waive the dividend declared by the company.
Although the statutory framework does not provide for a waiver, the relationship between the company and its shareholders can, to an extent, be governed by a contract, so long as such contract is not ultra vires the CA, 2013. It is a settled position that the Articles of Association (AoA) of a company form a contract between the company and its members and also inter-se among the members (see Naresh Chandra Sanyal v. Calcutta Stock Exchange Association1).
Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company
As per the Indian Contract Act, 1872 (‘Contract Act’), a proposal becomes a promise, only when it is accepted by the counterparty. A promise takes the form of an agreement which, if enforceable under law, becomes a contract. Therefore, there has to be assent from both the parties, in order to constitute a contract. Where one party only proposes, and the other does not accept, there is no question of a promise/agreement/contract.
Further, when a shareholder intends to waive his rights as to dividend – such a dividend foregone can be construed as a gratuitous transfer to the kitty of other shareholders – in essence, a gift. Under the settled principles of common law and as per section 122 of Transfer of Property Act, 1882, a gift is valid only when accepted by the recipient.
122. “Gift” defined.—“Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee
XX
Therefore, for a waiver to operate as a gift benefiting others, it must be accepted by the general body of shareholders who stand to receive this “gift”. Therefore, without the express consent by other shareholders, a request of waiver of dividend by one shareholder cannot be acceded to.
Section 37 of the Contract Act mandates that parties to a contract must perform or offer to perform their respective promises, unless such performance is excused under the Act or any other applicable law. Where under articles of association, a company agrees to declare and pay the dividend, the shareholders agree to receive the same in accordance with the provisions of the articles. Therefore, once a dividend is declared, the company is under a legal obligation to pay it and the shareholder is obligated to receive it. The shareholder cannot unilaterally waive this right unless such dispensation is as per law.
Here, it might also be relevant to discuss the peripheries of section 63 of the Contract Act, which provides that a promisee may waive or remit performance wholly or in part. But the spirit of this provision is to release the promisor of an obligation, not to impose an additional burden. In Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.2 it was held that a promisee may extend the time for the performance of the promise u/s 63 of the Contract Act. However, the promisor may choose not to accept the extended time if it will hamper the performance of his promise. Therefore, a promisor is not bound to accept any waiver of the promisee, he is allowed to weigh-in his/her own interests.
Therefore, section 63 does not operate without any boundaries.
Dividend declaration is a strategic financial decision taken by the Board after considering multiple factors such as growth strategy, return on equity, share price impact, liquidity needs, and need for reserves. If a company provides this right to one shareholder, it may have to provide the same right to other shareholders. Therefore, a unilateral waiver by a shareholder could distort this delicate balance in several ways, as it may affect the equitable treatment of shareholders and also impact the company’s policy on retained earnings/general reserves.
One may argue that Section 127 of the CA, 2013 which allows shareholders to give directions regarding the “manner of payment” of dividend, empowers them to waive their dividend. However, this is a misreading of the provision. Section 127 pertains to mode and timeline of payment, not the right to forgo the dividend altogether. Refusing to entertain a waiver does not constitute a violation of this section.
Thus, what appears to be an act of generosity might actually prejudice other shareholders and strain the company’s governance framework. Therefore, in our view, a shareholder seeking waiver of dividends may have a generous intent – however, that cannot happen without the approval of the general body of shareholders.
– Jigisha Aggarwal, Executive and Sourish Kundu, Executive
The laws governing related party transactions (RPTs) in India mandate seeking prior approvals for RPTs. The law has also provided for a rescue in the name of ‘ratification’ where prior approval could not be taken or taking prior approval was not feasible for various reasons. This article explains the meaning of ratification, consequences of failure to ratify either due to lapse of the time limit or exhaustion of the monetary limit, and reinforces the need for companies to tighten their process of RPT approvals. In particular, this article becomes pertinent in view of the recent amendments in Reg. 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) inserting express provisions for ratification of RPTs by Audit Committee (“AC”).
The ratification provision serves as a remedial measure, offering companies a chance to address regulatory lapses. This naturally raises several critical questions:
These questions and other related concerns are analyzed, explored and discussed in detail in this article.
In simple terms, ratification means giving formal consent to an act, deed, contract, or agreement that initially lacked the required approval, thereby making it valid. It involves granting consent to an action that has already taken place.
The Latin maxim “Omnis ratihabitio retrorahitur et mandato priori aequiparatur” translates to “every ratification is retroactively placed on equal footing with an act performed with prior authority.” This applies when someone acts on behalf of another without prior consent—if the concerned person later ratifies it, the act is treated as if it had been authorized from the start.
Ratification can be seen as a counterpoint to Admiral Grace Hopper’s well-known saying, “It is better to ask forgiveness than permission.” While this principle supports fast decision-making in large organizations, ratification should remain an exception rather than the norm for post-facto approvals.
The Supreme Court, in the matter of National Institute Of Technology & Anr v. Pannalal Choudhury & Anr [AIR 2015 SC 2846], traced back the meaning of the term “ratification” to a succinctly made definition by the English Court in the matter of Hartman v Hornsby [142 Mo 368 : 44 SW 242 at p. 244 (1897)] as follows:
“Ratification’ is the approval by act, word, or conduct, of that which was attempted (of accomplishment), but which was improperly or unauthorisedly performed in the first instance.”
Further, the Apex Court, in the matter of Maharashtra State Mining Corporation v Sunil S/O Pundikaro Pathak [2006 (5) SCC 96] reiterated the principle of ratification:
“The High Court was right when it held that an act by a legally incompetent authority is invalid. But it was entirely wrong in holding that such an invalid act cannot be subsequently ‘rectified’ by ratification of the competent authority. Ratification by definition means the making valid of an act already done. The principle is derived from the Latin maxim ‘Ratihabitio priori mandato aequiparatur’ namely ‘ a subsequent ratification of an act is equivalent to a prior authority to perform such act’. Therefore ratification assumes an invalid act which is retrospectively validated.”
As explained by the Bombay High Court in Pravinkumar R. Salian v. Chief Minister and Minister of Co-operation, Mumbai [2004(2)MHLJ12],[1] The essential conditions for a valid ratification include the following:
As is understood from the jurisprudence around, the following are the broad principles of ratification –
Ratification of RPTs is not a unique affair prevalent only in the Indian context. Even in the global parlance, regulatory references exist around the same, however, there is no concrete evidence of conditionalities around the same:
Practically, there may be genuine cases where the transaction could be blessed with prior approval and therefore be at the mercy of ratification, few cases:
While strong internal controls, automation, and strict monitoring can mitigate most of these issues, obtaining prior AC approval in every case may not always be feasible—especially for large listed entities with numerous RPTs. In such instances, ratification serves as a remedial mechanism.
Section 177(4) of the Companies Act, 2013 explicitly allows ratification of RPTs undertaken without prior AC approval for all companies [third proviso to clause (iv) of Section 177(4)]. However, before the LODR (Third Amendment) Regulations, 2024 (effective from December 13, 2024), no such provision existed for listed entities under the Listing Regulations.
With the recent amendment, Reg. 23(2)(f) now extends ratification provisions to listed entities. However, this is not unconditional, as specific criteria must be met, which are discussed in detail later.
The following section examines the differences between ratification provisions under the Listing Regulations and the Companies Act..
| Basis | Listing Regulations | Companies Act, 2013 |
| Governing Provision | Reg. 23(2)(f) | Section 177(4) |
| Authority to ratify | Independent directors forming part of the AC | All members of the AC |
| Permitted value | Rs 1 crore, aggregated with all ratifiable transactions during a FY | Rs 1 crore per transaction |
| Prescribed timelines | Earlier of: – 3 months from date of transaction – Next AC meeting | Within 3 months from the date of transaction |
| What if the value / timeline is exceeded | Transaction shall be voidable at the option of the AC | |
| Disclosure requirements | Details of ratifications to be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9) | No additional disclosures prescribed |
| Ratification of material RPTs | AC does not have the authorisation to ratify material RPTs | NA |
| Consequences of not getting AC approval for RPT | The concerned director(s) shall indemnify the company against any loss incurred by the company concerned, if: i. The transaction is with the related party to any director, or ii. The transaction is authorised by any director | |
The trail of AC ratifying an RPT is represented below:
Each condition is discussed in detail below:
Only those members of the AC who are IDs, can ratify RPTs.
Rationale: This is to ensure that the authority to ratify is in sync with the authority to approve. In terms of Reg. 23(2), only those members of AC who are IDs are authorised to approve RPTs, and hence, the power of ratification also vests with them only.
Given their role and responsibilities, Independent Directors (IDs) are least likely to have a “conflict of interest”, which is the primary concern behind RPT regulations.
SEBI’s penalty order in the LEEL Electricals case underscores the importance of IDs, as penalties were imposed on them for failing to fulfill their AC duties in overseeing RPTs. The company was penalized for fund diversion involving certain related parties.
Earlier of:
3 months from the date of the transaction, or the next meeting of the AC.
Rationale: This is intended to aid in timely decision-making and minimizing the chances for undue delay in scheduling AC meetings. While recommendations were made to keep the provision as later of the two, in view of the probable misuse of such provision by causing deliberate delay in conducting AC meetings, the timeline has been kept at earlier of the two [refer SEBI BM Agenda].
In practice, this does not impose an additional compliance burden, as Reg. 18(2) of the Listing Regulations mandates at least four AC meetings per financial year. Given the AC’s quarterly responsibilities, meetings are typically held within a three-month gap. Thus, a ratifiable RPT is unlikely to fail due to delayed placement, except in cases where weak internal controls cause a significant delay in identifying the lapse in prior approval.
An aggregate threshold of Rs. 1 crore has been laid down, for ratified transaction(s) with a related party, whether entered into individually or taken together, during a financial year.
Rationale: A low threshold has been specified to prevent misuse of the provision [refer SEBI BM Agenda].
The provision refers to (a) all ratified transactions, (b) in a financial year, (c) with a related party. Hence, all instances of ratification are to be aggregated for the complete financial year, on a per related party basis, and the same should not exceed the value of Rs. 1 crore.
It should be noted that w.e.f. April 1, 2025, pursuant to the Industry Standards Note on minimum information to be placed before the Audit Committee, Minimum Disclosures as prescribed therein is required to be placed before the Audit Committee.
Anonymous omnibus approval vis-a-vis ratification of RPTs
Reg. 23(3)(c) of the Listing Regulations allows the AC to grant anonymous omnibus approval for unforeseen RPTs, with a maximum limit of ₹1 crore per transaction. This approval does not require details like the related party’s name, transaction amount, period, or nature and remains valid for up to one year.
This creates an implied exemption for RPTs up to ₹1 crore per transaction, as they can proceed under the omnibus framework without fresh AC approval. However, unlike this per-transaction limit, ratification limits apply on an aggregated basis for all transactions with a related party in a financial year.
This raises a key question: Does the anonymous omnibus approval provision make ratification redundant?
The aforesaid question can be discussed in two contexts –
The relevance of ratification in each case can be understood with the help of specific examples.
i. Ratification for unforeseen RPTs
If an anonymous omnibus approval (OA) allows up to Rs. 1 crore per transaction, an unforeseen RPT of Rs. 80 lakhs falls within this limit and does not require ratification, as the OA serves as prior approval for such cases.
However, if an unforeseen RPT of Rs. 1.9 crores occurs, the entire Rs. 1.9 crore would require ratification, and the cover of Rs. 1 crore under the OA cannot be claimed.
In a case where the transaction is Rs. 2.5 crores and the OA is Rs. 1 crore, the entire amount (2.5 cr) exceeds ratification limits and therefore is voidable at the option of the AC.
Another example, where the foreseen RPT is for 1 cr – can this be included under the unforeseen RPTs? The answer should be No. Where the details of the RPT were available, irrespective of the value, they require prior approval of the AC after placing the requisite information before the AC.
ii. Ratification of foreseen RPTs
If the AC grants an omnibus approval for Rs. 100 crores for a specific transaction type with a particular RP, and the company undertakes an RPT of Rs. 101 crores, the excess Rs. 1 crore can be ratified by the AC, provided all specified conditions are met.
However, if a transaction of Rs. 105 crores is undertaken under the same approval, the excess increases to Rs. 5 crores, making ratification unavailable. This falls under “Failure to seek ratification,” discussed in detail below.
Reg. 23(1) sets the materiality thresholds for RPTs as the lower of Rs. 1,000 crores or 10% of the listed entity’s annual consolidated turnover. Transactions crossing this limit require prior shareholder approval.
Rationale: Ratification authority lies with the approving authority. Since AC cannot approve material RPTs, it also cannot ratify them. The authority to ratify remains with shareholders, who must approve such transactions in advance.
Listing Regulations do not explicitly allow shareholder ratification if materiality thresholds are breached. Failure to obtain prior approval leads to penalties, as seen in Premier Polyfilm Limited, where a fine was imposed despite later ratification.
If prior approval is missed, shareholders’ ratification may still be sought. While it does not remove the breach’s consequences, delayed compliance is better than non-compliance.
Ratification applies only when prior approval was not obtained, serving as a remedy for exceptional cases. It is crucial to present a proper rationale before the Audit Committee, explaining the inability to seek prior approval.
A key principle of ratification is the intent to ratify, as established in Sudhansu Kanta v. Manindra Nath [AIR 1965 PAT 144]. In Premila Devi v. The Peoples Bank of Northern India Ltd [(1939) 41 BOMLR 147], it was held that ratification requires both intent and awareness of illegality. The ratifying authority must have full knowledge of the breach, its reasons, and a justified basis for approval.
The details of ratification shall be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9) of the Listing Regulations.
Pursuant to SEBI Implementation Circular dated 31st December, 2024 the format for half-yearly disclosures of RPTs has been revised to include a column: “Value of the related party transaction ratified by the audit committee” to effectuate the disclosure of ratified RPTs.
Rationale: This is to promote maintenance of adequate transparency of substantial information, with the investors and shareholders.
A proviso to the newly inserted Reg 23(2)(f) specifies the consequences of a “failure to seek ratification”. The failure to seek ratification refers to a situation where the post-facto approval of AC could not be sought in accordance with the conditions laid down for ratification.
The failure to seek ratification may occur on account of one or more of the following:
(a) lapse of timelines for seeking ratification, or
(b) value of ratifiable transactions exceeding the limit of Rs. 1 crore in a FY, or both.
Here, it is important to note that in such an event, the AC may render such RPT voidable, and not necessarily void. Further, if it considers appropriate, it may seek indemnification from the concerned director(s), if any, for any loss incurred by the Company as a result of entering into such a transaction.
Differentiating between ‘voidable’ or ‘void’
Voidable means something that can be made invalid or nullified, and void means something that is invalid or null.
In Pankaj Mehra v. State of Maharashtra [2000 (2) SCC 756], the Supreme Court drew a distinction between “void” and ‘voidable’:
“The word ‘void’ in its strictest sense, means that which has no force and effect, is without legal efficacy, is incapable of being enforced by law, or has no legal or binding force, but frequently the word is used and construed as having the more liberal meaning of ‘voidable. The word ‘void’ is used in statutes in the sense of utterly void so as to be incapable of ratification, and also in the sense of voidable and resort must be had to the rules of construction in many cases to determine in which sense the Legislature intended to use it. An act or contract neither wrong in itself nor against public policy, which has been declared void by statute for the protection or benefit of a certain party, or class of parties, is voidable only.”
If a company fails to seek ratification, the transaction does not automatically become void unless explicitly declared so by the approving authority, usually the AC. The AC has the discretion to either:
Indemnification by director(s):
If the transaction is deemed invalid, indemnification may be sought from the concerned directors if:
With the introduction of ratification provisions in the Listing Regulations, the AC’s responsibility for RPT ratification has increased. This underscores the need for stronger internal control mechanisms to ensure efficiency and proactiveness. Automation of RPT controls should also be considered to reduce human errors and streamline compliance for better detection of RPTs. While ratification serves as a fallback in case of lapses, it should never be seen as a substitute for obtaining prior approvals.
[1] (2004) 2 MahLJ 12.
[2] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.
[3] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.
[4] Bulland Leasing & Finance Pvt. Ltd. v. Neelam Miglani, Delhi District Court, CC No.: 470664/16, 2018,
[5] Sudhansu Kanta v. Manindra Nath, AIR 1965 Pat 144.
[6] Parmeshwari Prasad Gupta v. Union of India, 1973 AIR 2389.
[7] New Fleming Spinning And Weaving Company Ltd. v. Kessowji Naik, (1885) ILR 9 Bom 373.
Read more:
Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime
FAQs on Standards for minimum information to be disclosed for RPT approval
Access the Youtube video at https://www.youtube.com/watch?v=QhCARmuzksM
– Sourish Kundu, Executive | corplaw@vinodkothari.com
The Ministry of Micro, Small, and Medium Enterprises (MSME), through its notification dated March 21, 2025, has revised the classification criteria for Micro, Small, and Medium Enterprises. While the proposed revision was mentioned in the Union Budget 2025, the formal notification confirms the upward revision of classification limits, effective April 1, 2025. This revision will permit several enterprises to qualify as MSMEs, as also allow existing MSMEs to expand, without losing their present classification.
During the 2025 Budget Speech, the Hon’ble Finance Minister emphasized the critical role played by MSMEs in India’s economy:
“Currently, over 1 crore registered MSMEs, employing 7.5 crore people, and generating 36 per cent of our manufacturing, have come together to position India as a global manufacturing hub. With their quality products, these MSMEs are responsible for 45 per cent of our exports. To help them achieve higher efficiencies of scale, technological upgradation, and better access to capital, the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times, respectively. This will give them the confidence to grow and generate employment for our youth.”
| Category | Investment in Plant and Machinery or Equipment (₹ crores) | Annual Turnover (₹ crores) | ||
| Current | Revised | Current | Revised | |
| Micro | ≤1 | ≤2.5 | ≤5 | ≤10 |
| Small | ≤10 | ≤25 | ≤50 | ≤100 |
| Medium | ≤50 | ≤125 | ≤250 | ≤500 |
It is important to note that MSME classification follows a composite criterion, meaning that if an enterprise exceeds either the investment or turnover limit, it will be reclassified into the next higher category.
With effect from FY 2025-26, a substantial rise in eligible enterprises is expected, leading to a new influx of registrations on the UDYAM portal. The notification dated June 26, 2020 (the principal circular) prescribes the process for UDYAM registration.
A pertinent question arises regarding enterprises currently classified as Medium or Small Enterprises: Will they be downgraded to Small or Micro Enterprises due to the reclassification? Clause 8(6) of the principal circular clarifies:
“In case of reverse graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place.”
This means that enterprises eligible for reverse graduation will retain their existing status until March 31, 2025, with the revised classification taking effect from April 1, 2025.
The reclassification is expected to have far-reaching consequences across various economic sectors. Some key implications include:
One of the major benefits for Micro and Small Enterprises (MSEs) over Medium Enterprises is derived from Section 43B(h) of the Income Tax Act, 1961, which allows deductions for payments made to MSEs only on a cash basis (i.e., upon actual payment rather than accrual). This provision aligns with Section 15 of the MSMED Act, 2006, which mandates payment within 45 days.
With a larger number of enterprises falling under the MSE category, buyers availing goods and services from these entities will need to ensure timely payments. Delays beyond the prescribed timelines may lead to tax disallowances and potential compliance issues.
In addition to disallowance of deductions under the Income Tax Act, 1961, such debtors, also have to comply with the requirement of filing Form MSME-1 on a half yearly basis, as discussed below.
The Ministry of MSME, via its notification dated March 25, 2025, has mandated that companies receiving goods or services from MSEs and failing to make payments within 45 days must file Form MSME-1 on a half-yearly basis, disclosing outstanding amounts and reasons for delay.
The form was revised by MCA’s order dated July 15, 2024; however, the revised classification criteria will not impact filings for the six months ending March 2025. Companies must ensure that subsequent filings accurately reflect payments owed to newly classified MSEs.
Furthermore, the Budget 2025 proposed enhancements in credit guarantee coverage:
These initiatives are expected to bolster MSME financing through schemes like the Emergency Credit Line Guarantee Scheme (ECLGS), Credit Guarantee Fund Schemes (CGS-I & CGS-II), Credit-Linked Capital Subsidy Scheme (CLCSS), and the Micro Finance Programme. A comprehensive overview of these schemes can be accessed here.
The expansion of MSME eligibility is set to widen the scope of financing options available to these enterprises. Under RBI’s Master Directions on Priority Sector Lending, loans extended to MSMEs are considered part of banks’ priority sector obligations. The increase in eligible entities may result in higher loan disbursements across both manufacturing and service sectors.
As per the Master Direction – Priority Sector Lending (PSL) – Targets and Classification, domestic Scheduled Commercial Banks (SCBs) and foreign banks must allocate 40% of their Adjusted Net Bank Credit (ANBC) to priority sectors, including Micro, Small, and Medium Enterprises (MSMEs). Specifically, domestic SCBs and foreign banks with 20+ branches must lend at least 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure (whichever is higher) to Micro enterprises.
With a broader pool of eligible MSMEs, platforms such as TReDS (Trade Receivables Discounting System) and other supply chain financing mechanisms may witness an upsurge in receivables for securitization. This could lead to improved liquidity and lower financing costs for MSMEs. A detailed discussion on MSME receivables securitization is available here.
Apart from credit-related benefits, MSMEs receive various non-financial support from the government. Some of these are highlighted below:
These targeted initiatives collectively strengthen MSME growth, market access, and technological advancement.
While the upward revision of MSME classification limits may appear to be a simple adjustment, its implications are widespread. The surge in registrations will not only affect enterprises seeking MSME benefits but also influence businesses procuring goods/services from them and financial institutions extending credit. Companies and financial stakeholders must revisit internal policies to adapt to the evolving MSME landscape and ensure smooth compliance with the revised framework.
Read more on MSMEs here:
You may refer to our other FAQs on dematerialization of shares here and you may also refer to our Snippet, detailed article and YouTube Video
Changes proposed in manner of RP identification, threshold for significant RPTs
– Avinash Shetty, Manager and Sourish Kundu, Executive | corplaw@vinodkothari.com
Related Party Transactions (“RPTs”) have been one such evergreen and ever-evolving aspect of corporate governance that has been put to guardrails on a frequent basis. SEBI, in its Consultation Paper dated 7th February, 2025 has again rolled out a new set of proposals, this time primarily centered around RPTs undertaken by subsidiaries of a listed entity, but nevertheless leaving listed entities pondering on what their actionables might be. In this article, we have analysed the proposals in brief.
Proposal: Following SEBI’s Informal Guidance on the manner of identification of Related Parties (“RPs”), which opined that the subsidiaries of LEs should maintain a list of their RPs in accordance with the Listing Regulations, instead of maintaining the same as per their respective applicable/local laws, SEBI now proposed to effectuate the same by way of appending an explanation to Reg. 2(1)(zc) that RP of subsidiary to be identified as per Reg. 2(1)(zb) of the Listing Regulations.
Although the proposed insertion does not differentiate between a listed and an unlisted subsidiary, it is clearly understood that a listed subsidiary shall, by default, be following the holistically covered definition of RP given under Reg. 2(1)(zb). On the other hand, an unlisted subsidiary which may so far been following the definition of RP as given under the Companies Act, 2013 (“the Act”) might be expected to buckle up to bring in a lot more persons under the purview of the RPT regime as per the LODR definition – for the purpose of facilitating the parent’s RPT compliances.
Possible concerns: While the SEBI’s approach of applying an entity-agnostic definition may seem to bring consistency and ease of collation of information across the group, but may raise several issues:
The issues in putting the said proposal in action have been discussed in detail in our write up on SEBI’s IG on RP identification by unlisted subsidiaries.
Actionables: If the proposals take the shape of law, the following actionables might arise:
Proposal: Moving on to thresholds for significant RPTs – an RPT of the subsidiary to which the holding LE is not a party requires prior approval of the AC of the holding LE before it can be entered into, if the value of such RPT exceeds 10% of annual standalone turnover, as per the latest audited financial statements of the subsidiary, taken together with all transactions during a FY. [Pursuant to Regulation 23(2)(c) of the Listing Regulations] (hereafter referred to as “significant RPTs”)
However, as discussed in the CP, there may be cases where a transaction by a subsidiary of a LE exceeds the material RPT threshold, requiring shareholder approval, but does not exceed 10% of the subsidiary’s standalone turnover, thus bypassing the AC approval. For example, if a subsidiary has a standalone turnover of ₹12,000 crore, a transaction of ₹1,100 crore would cross the material RPT threshold of ₹1,000 crore . This would require shareholder approval. However, since ₹1,100 crore is below 10% of the subsidiary’s standalone turnover (₹1,200 crore), AC’s approval would not be needed.
The proposal seeks to include the absolute threshold of Rs. 1,000 crores as well in determining significant RPTs. Significance would be determined on the basis of value of transaction being Rs. 1,000 crores or 10% of annual standalone turnover of the subsidiary, whichever is lower. In our view, however, this proposal is more clarificatory in nature as it is difficult to envisage that any RPT proposal going to shareholders of an LE can go directly without coming before the AC of the LE. We have covered this scenario in our FAQs on RPT as well.
A specific carve out from the above requirement has been set down in respect of listed subsidiaries on which corporate governance norms and RPT framework norms are applicable.
Further, in order to impose RPT controls on SME listed entities, SEBI in its Board Meeting held on 18th December, 2024 approved, among other items, the materiality threshold of Rs. 50 crores or 10% of annual consolidated turnover, whichever is lower. Accordingly, for the purpose of determining significant RPTs of an unlisted subsidiary of SME LE, the threshold is Rs. 50 crores or 10% of annual consolidated turnover, whichever is lower. Note that the provision is applicable to a subsidiary of an SME LE – this is clear from para 5.3.1 of the CP.
The proposal as to thresholds is as tabulated below:
| Limits for Significant RPTs (whichever is lower) | Having financial track record* | Not having financial track record* |
| Subsidiaries of Main Board LEs | Rs. 1,000 crores or 10% of annual standalone turnover | Rs. 1,000 crores or 10% of standalone net worth |
| Subsidiaries of SME LEs | Rs. 50 crores or 10% of annual standalone turnover | Rs. 50 crores or 10% of standalone net worth |
*Note:
Actionables: Unlisted subsidiaries of listed entities will have to reassess their transactions falling under significant RPTs to be taken to the listed parent’s AC.
Although the change is merely clarificatory in nature, it is pertinent to note that there has been some ambiguity for RPT approvals, when RPTs are being entered into between a holding company and its wholly owned subsidiary (WoS). Given that applicability of the Listing Regulations encompasses only listed entities, it was implied that the holding company referred is a listed holding company whose accounts are consolidated and presented to shareholders at the general meeting, and not an unlisted one.
This interpretive addition of the word “listed” aims to remove any ambiguity in respect of the exemptions granted for certain RPTs involving WoS.
The impact of the changes, if and when notified, may be expected to be as far fetched and require a revised understanding of the RPT regime to some extent, even if not entirely, similar to the rippling effect of the SEBI (LODR) (3rd Amendment) Regulations, 2024 dated 12th December, 2024. Further, there are certain aspects such as revision in definition of RPs for subsidiaries, which would require an introspection not just on the part of the subsidiaries of LEs, but at the group level as well. Needless to say, RPT – regime and controls, has always been a trending topic and changes w.r.t the same, although the first of this year, can definitely not be expected to be the last.
The RPT framework under the Listing Regulations has already been amended 7 times, and every time, it becomes tougher, all in the name of “Ease of Doing Business”. A document collating the evolution of RPT framework over the years is here: https://lnkd.in/gZ3Ca5yQ
Read more on Related Party Transactions here.
Reload document 
Open in new tab