Corporate governance enforced on debt listed entities

  • LODR (Fifth Amendment) Regulations, 2021 notified

Payal Agarwal, Executive (

Brief background

SEBI has, continuing with its trends of the recent months, notified SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021 [hereinafter referred to as the “Amendment Regulations”] on 7th September, 2021 to amend the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [hereinafter referred to as the “Listing Regulations”]. The amendments have huge implications on debt listed companies and provide for various mandatory requirements to be fulfilled by an entity which has listed its debt securities on stock exchanges. While some changes deal with alignment of the requirements with those under the Companies Act, 2013 [“Act”], some are significantly different calling for actionable on the part of debt listed companies.


Particulars Applicable entities Applicable dates
Chapter IV – Regulations 16 to 27

(“Corporate Governance Provisions”)

Entities which has listed its non-convertible securities (“NCS“) on a recognised stock exchange and has outstanding listed debt securities of Rs. 500 crores or more [hereinafter referred to as “high value debt listed entities” or “HVDs”]


Presently, limit has to be checked as on 31st March, 2021

Applicable w.e.f. 07th September, 2021 on “comply or explain” basis


Mandatory w.e.f. 31st March, 2023


·         Comply or explain shall mean –

a.       Comply with the requirements within 31st March, 2023

b.      In case of non-compliance/partial compliance, explain reasons for same along with steps initiated to ensure compliance

·         to be reported in the quarterly compliance report filed under Reg 27

Applicability attracted during the course of a year to be complied within six months of such applicability
Amendments relating to Chapter V of the Listing Regulations applicable on all entities which have listed its non-convertible securities on recognised stock exchange with effect from 7th September, 2021

Further, it is mentionable that vide amendment in Reg 3(3) of the Listing Regulations, the Corporate Governance Provisions once applicable on a HVD entity, has to be complied with and does not cease to apply subsequently unless the company has no listed debt outstanding.

Corporate governance requirements applicable on HVDs

The debt-listed companies are mostly private companies or public companies that are unlisted for the purposes of the Act, and therefore, the alignment of their board composition with that of other listed entities may call for various actionable and some practical difficulties during the course of implementation. Here, we have tried to present the composition of board and committees as will be required to be ensured by the debt-listed entities and the possible constraints that may follow.

Relevant head Under the Act Under the Listing Regulations
Private company Unlisted public company
Ratio of executive (ED) and non-executive directors (NED) NA NA optimum combination with at least 50% NEDs
No. of independent directors (IDs) NA 2 IDs 1/3rd if Chairperson (CP) is NED

½ if CM is ED

Maximum age of NED NA NA 75 years (if beyond that, a special resolution is required along with justification for such appointment)
Minimum no. of board meetings (BM) with maximum gap between two meetings 4 (with a max gap of 120 days between two subsequent meetings) Same Same
Remuneration/ commission to directors NA As per the limits of net profits u/s 197 of the Act read with Sc. V –

Special resolution of members required if exceeds limits

·         Aggregate remuneration to all – 11%

·         Single ED – 5%

·         All EDs in aggregate – 10%

·         All NEDs in aggregate – 1%/ 3% (if no NEDs)


Approval of members by way of shareholders’ resolution required if –

·         Commission to single NED > 50% of total commission payable to NEDs

·         Annual remuneration to each ED > Rs. 5 crores or 2.5% of net profits – HIGHER

·         Aggregate remuneration to all EDs > 5% of net profits

Performance evaluation of IDs NA criteria of evaluation to be formulated by NRC to be done by entire board
Maximum no. of directorships in 20 companies (out of which max 10 can be public cos.) in 20 companies (out of which max 10 can be public cos.) Not more than 8 directorships in listed entities (excludes debt listed entities)

Not more than 7 directorships in listed entities as ID (excludes debt listed entities)

Composition of Audit Committee (AC) NA  

●      Min 3- directors

●      Majority of IDs

●      Majority of members (inl. chairperson) shall be a person with ability to read and understand financial statements.

●      Min- 3 directors

●      At least 2/3rd of (ID)

●      All members to be financially literate and at least 1 member shall have accounting or related financial management expertise.)

●      Chairman – shall be ID

●      CS – Secretary of Committee.

Meetings and quorum of AC Not Specified. ●      At Least 4 times in a year and  (with a max gap of 120 days between two subsequent meetings)

●      Quorum – 2 or 1/3rd of the members, whichever is greater, with at least 2 IDs.


Composition of Nomination and Remuneration Committee (NRC) NA ●      Min- 3 NEDs

●      At least not less than half directors shall be ID.

●      Chairperson of the entity, Executive or not, may be member of committee but not the CM of Committee

similar requirements except that CM must be an ID
Meetings and quorum of NRC Not Specified. ●      Quorum – 2 members or 1/3rd of the members, whichever is greater, with at least 1 ID.

●       At least one meeting in a year.


Composition of Stakeholders Relationship Committee (SRC) Applicability- Company which consists of >1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a FY.

●      CP- shall be a NED.

●      Members as decided by board.

●      CP- shall be a NED.

●      Min- 3 directors, with at least 1 being ID.


Meetings of SRC Not Specified. ●      Committee shall at least meet once a year.
Composition of Risk Management Committee (RMC) NA NA  

●      Min- 3 directors, with majority of them being members of BOD, including at least 1 ID

●      Chairperson- Member of BOD and Sr. executives may be members.


Meetings and quorum of RMC ●      Quorum – 2 members or 1/3rd of the members, whichever is higher, incl.  at least one member of BOD in attendance.

●      Committee shall meet at least twice in a year(w.e.f 5.5.2021)

Related Party Transactions (RPT) In case of private company –  second proviso to Sub-section (1) of Section 188  shall not apply. ●      Approval required only for specified transactions under Sec 188

●      All members of AC can vote

●      All RPTs shall require prior approval of the AC.

●      Only those members who are IDs shall approve RPT

Secretarial Audit Applicability- O/S loans or borrowings from banks or public financial institutions of 100 crore or more. Applicability-

PUSC- 50 cr or more, or

Turnover- 250 cr or more

O/S loans or borrowings from banks or public financial institutions of 100 crore or more.


Note- Material Unlisted company of a listed entity is also covered.

Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial  audit.


Every listed entity shall submit a secretarial compliance report within 60 days of the end of FY.

Analysis of the amendments

As demonstrated in the table above, the compliances that will be made applicable to an HVD entity are much more diverse than that applicable to a private company/ unlisted public company. However, these debt listed entities are mostly non-banking financial companies (NBFCs), on which the corporate governance directions of RBI are applicable. Considering the same, the amendments may not result in wide impact and changes in the existing board and committee structure. Only minor modifications may be required to align the composition in such a way that it meets the criteria of both RBI (under Corporate Governance Directions) and SEBI (under Listing Regulations).

Maximum number of committees’ memberships – an anomaly in the language of law?

Reg 26 of the Listing Regulations specifies the maximum no. of committees in which a director can hold membership/chairmanship. It provides that a director cannot be a member in more than 10 committees and Chairman in more than 5 committees at any one time. In regard with the same, certain classes of companies are specifically included/ excluded as below –

Here, while the public companies are specifically included in one hand, HVDs have been excluded which can be public as well as private companies. Therefore, there arises an anomaly as to whether public companies, being HVDs, are exempted while calculating the number of committees, or whether the same has to be included?

A possible interpretation that may follow is that a company, only on account of being a HVD, will not get included for the purpose of counting committee memberships under this Regulations. However, a public company, being specifically included irrespective of being listed or not, committee memberships of such public companies should also be taken into account which are listed as HVD entities.

Board-level compliances


Increased compliance burden on debt listed entities

Besides the corporate governance provisions that have newly become applicable on the HVD entities, the regular compliances of the debt listed entities have also undergone vivid changes mostly in line with the requirements applicable to a listed entity having its equity shares listed in stock exchange. The compliance requirements are two fold – (i) increasing the disclosures required to be made to the stock exchanges and (ii) increasing the frequency of such reporting/ disclosures (shifting half yearly compliances into quarterly etc). The Amendment Regulations also provide clarity with regard to the time within which disclosures are required to be made. General terms have been replaced with more specific matters and timelines.

Quarterly compliances

Requirement with respect to financial results*

In the erstwhile Reg 52, the debt listed entities had an option to submit unaudited financial results followed by annual audited financial results once approved by the Board. However, vide the Amendment Regulations, it has been mandatory for the debt listed entities to submit audited financial results within 60 days from the end of the financial year. Some additional accounting ratios have also been specified to be disclosed by the companies. Further, the asset cover is also required to be disclosed along with the results.

A clarificatory change is with regard to the exemption of providing information related to debt service coverage ratio and interest service coverage ratio by Housing Finance Company (HFC) along with NBFC.

Half-yearly compliances

Website disclosures

Any change in the information has to be updated within two days. The stock exchange intimations are required to be kept in the website for a period of 5 years and archived thereafter.

Stock exchange intimations

Matters concerning the debenture holders are also required to be intimated to the debenture trustee simultaneously with intimation to the stock exchanges.

Material modifications in structure of NCS

Reg 59 deals with the approvals required for any material modifications to be made in the structure of NCS. The three step process requires –

  1. Approval of board and debenture- trustee
  2. Approval of debenture-holders
  3. Approval of stock exchanges

In the erstwhile Regulations, the consent of a requisite majority of securities holders was required to be taken before applying to the stock exchange for its approval. However, in the Amendment Regulations, the written consent of atleast 3/4th (by value)of the securities holders is required to be taken, before proceeding with any material modification in the structure of NCS. The company is further required to provide e-voting facilities in respect of the same.

Our comments –  Requirement of consent of 3/4th by value is in line with the requirements for variation of rights under Section 48 of the Act, which applies to variation in rights of shareholders. However, the same may not be practically possible in case of debenture holders, who may not care to vote at all. Moreover, considering that the debenture trustee is already approving the modification, adequate protection to debenture holders are already ensured.  Further, what is material modification is not a defined term and left to the discretion and judgement.

Concluding Remarks

The status of debt listed companies had undergone a change with effect from 1st April, 2021 after an amendment in the definition of listed companies under the Companies Act, 2013, vide which the debt listed companies were no more considered as a ‘listed’ company for the purposes of the Companies Act, 2013. This might have led to loose ends in the corporate governance of such debt listed companies. SEBI’s move of enforcing corporate governance provisions on HVD entities can be seen as a measure to refill the gaps. However, the corporate governance provisions under the Listing Regulations are quite stringent and will make it tougher for the private companies to get their debt securities listed. While there is a minimum outstanding listed debt threshold to determine applicability of such corporate governance provisions, however, the limits are very minimal from the viewpoint of companies and will take a huge chunk of debt listed companies under its ambit.


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Understanding the unification of SEBI’s share-based employee incentive schemes

– Highlights of the SEBI SBEB and Sweat Equity Regulations

– Corplaw Division,

In order to consolidate SEBI (Share Based Employee Benefits) Regulations, 2014 (‘SBEB Regulations’) and SEBI (Issue of Sweat Equity) Regulations, 2002 (‘Sweat Equity Regulations’), SEBI had issued a discussion paper on July 8, 2021. The changes proposed in this discussion paper as well as incorporation of the previously issued SEBI Circulars in the context of SBEB Regulations have now been imbibed under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (‘New Regulations’) which are effective from August 13, 2021. The same aims at rationalization of the erstwhile provisions in order to make them more vigorous with best global practices and ease of doing business.

In this article, we have discussed the major highlights and actionable rolling out of the said New Regulations.


1. Enabling definition of employees

  1. Following the intent stated in the discussion paper issued in this regard, the New Regulations give a free hand to a company coming up with a share-based employee benefit scheme (SBEB Scheme). That is to say that as per the language used under the New Regulations under regulation 2(1)(i), the company can choose which employees can be included under any SBEB Scheme. Accordingly, from the date of enforcement of the said provisions, permanent as well contractual employees may be considered for the purpose of granting SBEB. Further, this change is applicable in reference to issuance of sweat equity shares as well.
  2. Furthermore, an employee, whether permanent or not, must be exclusively working for the company or its group companies. The word ‘exclusive’ is added by the New Regulations for ensuring that even though a non-permanent employee is also eligible for SBEB but he must be working on an exclusive basis either in India or outside. This exclusive working criteria is only applicable for SBEB and not for issuance of sweat equity.
  3. Also, as a matter of clarificatory change, the New Regulations specifically state that an NED is also included within the ambit of the term ‘employee’ who is not a promoter or a member of the promoter group. It is pertinent to note that the concerned provision was already present in the erstwhile SBEB Regulations [regulation 2(1)(f)(ii)]; however, an explicit provision in this connection has been made for the sake of avoiding any ambiguity or difference of interpretation.
  4. Lastly, the New Regulations have increased the ambit of the term ‘employee’ under regulation 2(1)(iii) in the context of by stipulating that an employee or director of a group company including holding, subsidiary or associate group shall also be eligible to be included under the purview of the term ‘employee’. Under the erstwhile SBEB Regulations [regulation 2(1)(f)(iii), only an employee or director of a holding or subsidiary company was included under the criteria.


The whys and wherefores: The new Regulations have increased the arena of the term ‘employee’ in order to provide flexibility to the companies so that they can cover more employees under the schemes offered for their benefit. Further, the New Regulations have permitted the designated employees of group companies to be qualified for the purpose of SBEB schemes.  


2. Cash-settled SARs fall outside the purview of the New Regulations

Explanation 2 as added under regulation 2(1)(qq) of the New Regulations explicitly state that any reference to stock appreciation right or SAR shall mean equity settled SARs and will not include any scheme which does not, directly or indirectly, involve dealing in or subscribing to or purchasing securities of the company. This gives an indication that any scheme which is settled only in cash and not involves equity will fall  outside the purview of the New Regulations.

As clearly specified under the New Regulations, the provisions shall be applicable in case of an equity settled SARs scheme as well as a scheme wherein the company has not stated upfront whether the same would be settled in cash or equity. However, in case of a scheme which is to be settled in cash only, the same has been seemingly made to fall outside the purview of the New Regulations.

The whys and wherefores: The rationale behind the present change is to make the provision related to SAR in line with the applicability criteria for an employee benefit scheme as covered under both the erstwhile SBEB Regulations and the New Regulations under regulation 1(4)(ii) which states that for application, a scheme should be for direct or indirect benefit of employees and involves dealing in or subscribing to or purchasing securities of the company directly or indirectly, Therefore, it is now cleared that cash settled SAR will not be governed by the New Regulations.

3.Applicability to equity listed companies

Regulation 1(4) of the New Regulations explicitly states that the provisions of the concerned regulations shall apply to any company whose equity shares are listed on a recognised stock exchange in India. The word ‘equity’ is specifically added by the New Regulation while in the erstwhile SBEB Regulations, the reference was made with respect to a company whose shares are listed on a recognised stock exchange [Regulation 1(4)].

The whys and wherefores: This change is put forth only for the purpose of clearing the language of the concerned provision although the intention was clear under the erstwhile SBEB Regulations as well.

4. NRC may act as Compensation Committee

As per the recommendations proposed in the consultation paper of the Expert Group, the New Regulations have enabled the NRC to act as compensation committee for the purpose of these regulations. The reference to Regulation 19 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) has been provided under the New Regulations under regulation 5(2).

The whys and wherefores: The Expert group asserted that a listed company already constitutes NRC as per the mandate and therefore, it could perform all the functions as are endowed on a compensation committee.

5. Switching of route of administration: Trust v/s Direct

Second proviso as added to Regulation 3(1) of the New Regulations stipulates that a company is allowed to change the mode of implementation of the scheme if the following conditions are satisfied:

  • Prevailing circumstances should warrant such change.
  • Fresh approval from shareholders via special resolution is obtained before affecting such change.
  • Such change should not be prejudicial to the interest of the employees.

The whys and wherefores: This can be inferred as one of the most liberating changes introduced by the New Regulations. A company can now flexibly switch the administration of a SBEB scheme i.e. from direct route to trust or vice versa. This move will eliminate the difficulty being faced by the companies in deciding upfront whether a scheme is to be implemented through a trust or otherwise.

In order to avail the benefit of the amendment, the company will be required to state the circumstances warranting the change. As the trust can be used as a good device to fund the acquisition of the company’s own shares at an opportune price, thereby minimising the cost to the company, the same may constitute as a reason warranting the change in route of implementation.

6.Varying terms of scheme due to regulatory changes

A company is allowed to vary the terms of the scheme offered subject to shareholders approval via special resolution and ensuring that the intended variation is not in any way prejudicial to the employees. However, under the erstwhile SBEB Regulations, companies were dubious with respect to the applicability of the shareholder’s approval via special resolution for varying the terms of the scheme for the purpose of meeting any regulatory requirement. This issue was mainly on account of the language used which lacked clarity on the concerned subject. Therefore, in order to bring clarity, the New Regulations have amended the provision with respect to varying the terms of the scheme on account of any regulatory requirement which was earlier made part of the restrictive sub-regulation under the erstwhile SBEB Regulations [Regulation 7(1)]. Hence, any variation in the terms of the scheme on account of any regulatory requirement which is restrictive in nature and without changing which the scheme becomes inoperative can be made without shareholder’s approval.

The why and wherefores: Since regulatory changes, the periodicity of which is unpredictable, are not in the control of a company therefore, any SBEB scheme which warrants variation to be made on account of regulatory changes should be allowed to be undertaken by the company without any pre condition as to obtaining shareholder’s approval.

7. Repricing now only with help of a special resolution

Under the erstwhile provisions [Regulation 7(5)], re-pricing of options/SARs/shares required passing of an ordinary resolution. However, Regulation 7(5) of the New Regulations mandate for a special resolution to be obtained.

Any compliance which is being made pursuant to the amendment should abide by the same, however, acts of the past need not be re-done therefore, any options/SARs/shares which were repriced basis shareholders’ approval via ordinary resolution prior to the advent of the New Regulations, will not be affected with the new compliance requirement.

The whys and wherefores: Repricing decision, especially in the situation when the market is not doing good, can affect the wealth of the shareholders on account of the increased financial burden that a company would have to bear pursuant to heavy discounting in order to make the scheme attractive.

8. Determining total ceiling for secondary acquisition

Explanation 1 to Regulation 3(11) of the New Regulations stipulates that the reduction of share capital by virtue of a buy-back or scheme of arrangement, etc. should also be factored in the calculation of limits of shareholding of trusts under secondary acquisition.

The whys and wherefores: The erstwhile SBEB Regulations [Explanation 1 to regulation 3(11)] prescribed that where there is expansion of capital on account of corporate actions including issue of bonus shares, split or rights issue then such expansion shall be taken into account while reckoning the limits of shareholding of trusts under secondary acquisition. However, the Expert Group was of the view that similar to situations such as bonus issues, where the paid-up share capital (and accordingly the shareholding of the trust) of the company increases proportionately, the reduction of capital may also take place due to corporate actions such as buy-backs. Therefore, taking into account only expansion would not be feasible. When capital is reduced, the shareholding of the trust should also react accordingly and hence the present change is introduced.

9. Transfer of surplus on winding up of scheme

Regulation 8 of the New Regulations stipulates that the surplus money or shares remaining on winding up of the scheme, may be transferred to other existing schemes under the regulations, subject to approval obtained by shareholders on the recommendation of the compensation committee.

The whys and wherefores: The rationale behind the same is that the assets of the trust are acquired and earmarked for the benefit of the employees of the company, therefore, if any surplus remains with the trust upon winding up, an option has been provided for deferring the utilisation of such funds or using it for the benefit of employees through a different scheme under the regulations.

10. Certification by secretarial auditor

Annual Compliance Certificate

Regulation 13 of the New Regulations expressly envisages that board of directors are required to obtain compliance certificate on annual basis from secretarial auditors of the company. The words ‘secretarial auditors’ have been added in order to clear the ambiguity created by the erstwhile SBEB Regulations [regulation 13] where the only word mentioned was ‘auditors’. As a matter of practice, companies used to obtain the certificate from their statutory auditors.

Compliance certificate certifying administration and implementation of General Employee Benefit Scheme (‘GEBS’) as per the prescribed regulation

Further, Regulation 26(2) of the New Regulation dealing with administration and implementation of GEBS stipulates that  “the shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of GEBS”. As per the New Regulations, the threshold should be considered as on the date of balance sheet since the erstwhile approach of reckoning threshold not to exceed “at any point of time” was practically not feasible on account of fluctuating share prices.  Furthermore, a compliance certificate from the secretarial auditor in this regard at the time of adoption of such a balance sheet by the company is also introduced as a mandatory requirement.

Compliance certificate certifying administration and implementation of Retirement Benefit Scheme (‘RBS’) as per the prescribed regulation

Also, Regulation 27(3) of the New Regulation dealing with administration and implementation of RBS stipulates that “the shares of the company or shares of its listed holding company shall not exceed ten per cent of the book value or market value or fair value of the total assets of the scheme, whichever is lower, as appearing in its latest balance sheet (whether audited or limited reviewed) for the purposes of RBS”. Alike GEBS, similar change is introduced by the New Regulations under the RBS provision as well with the same intention challenging the erstwhile approach of reckoning. And again alike GEBS, a compliance certificate from the secretarial auditor to this effect is introduced as a mandatory requirement under RBS as well.

The whys and wherefores: As per the usual practice, it was statutory auditors who were issuing this compliance certificate however, it was perceived by the Expert Group, constituted by SEBI for recommendations with on the New Regulations, that the secretarial auditor was more conversant with these laws compared to other categories of persons, and it is the secretarial auditor that is required under Regulation 24A of the LODR Regulations, to furnish a secretarial audit report on an annual basis therefore, it would be more feasible if the concerned compliance certificate is issued by secretarial auditor and accordingly, the concerned change is introduced. Further, introduction of secretarial auditor certificate certifying compliance w.r.t implementation and administration of GEBS or RBS is to ensure due compliance under the New Regulations.

11.Extension of time period for appropriation of shares

Under regulation 3(12) of the New Regulations, the period of appropriation of shares acquired through secondary market acquisition, not backed by grants, has been extended from the current time period of 1 year to a period of 2 years, subject to the approval of the compensation committee.

The whys and wherefores: The idea behind the present change is to provide flexibility from the rigid time period. However, this may allow companies to use the provision for appropriation to support their own share prices by purchasing the same without any intention to make grants.

12. In-principle approval prior to grant of options

Regulation 12(3) of the New Regulations explicitly stipulates that for listing of shares issued pursuant to ESOS, ESPS or SAR, the company shall obtain the in-principle approval of the recognized stock exchanges where it proposes to list the said shares prior to the grant of options or SARs.

The why or wherefores: The words ‘prior to the grant of options or SARs’ are added in the New Regulations primarily to address the issue arising on account obtaining in-principle approval after grant and exercise. It was asserted by the Expert Group that this practice might cause delay in allotment because of non-receipt of such approval as the regulator may determine that the listed entities are non-compliant or the scheme is not in accordance with SBEB Regulations.

13. Role of compensation committee w.r.t. buy-back of options

Part B to the Schedule-I of the New Regulations provides that the compensation committee shall prescribe the procedure for buy back of securities issued under SBEB scheme.

The whys and wherefores: Buy back of stock options have been mentioned under the Companies Act, 2013 as well as the SEBI Buyback Regulations, however, there is no standard procedure to implement the same. Before we first understand what is the amendment, we need to know the concept of buy back of stock options.

A situation for buyback of stock option is likely to occur when the option holder is not willing to exercise the said option for reasons like, fall in share prices leading to the exercise becoming unattractive, lack of funds in the hands of the option holder etc. Under such a situation, if the company wants to pay cash to the option holder instead of the shares, the same can be done by buying back the options held by the option holders. The Expert Group in the Consultation Paper has also mentioned about a situation where due to a regulatory requirement; issuance of shares is not possible and consequent to which the company decides to pay cash instead of issuing shares. While a practical case under the situation stated by the Expert Group may not be ascertained as of now, however, it has been thought of a probable situation for carrying out buy back of options. Further, buy back of options is likely to happen for those which have been vested.

The Expert Group was of the view that flexibility in formulating requisite terms and conditions and procedure for buy back of options would be more meaningful rather than setting out a framework requiring all listed companies to follow a standard procedure in this regard. The requirement for setting out the terms and conditions of schemes to be formulated by the compensation committee was provided under the circular issued previously in this regard. However, the same did not include an express provision relating to procedure and terms and conditions for buy-back including permissible sources for financing the buy-back, minimum financial threshold to be maintained, quantum of securities to be bought back etc.

14. Consolidation of SEBI Circulars

SEBI Circular dated July 15, 2021, provided for immediate vesting of options, SAR or any other benefits in the event of death of an employee. In the said circumstance the requirement of minimum vesting period of 1 year has been done away with. The same has been prescribed under regulation 9(4) of the New Regulations, which stipulates that the options shall vest immediately from the date of death in the legal heirs or nominees of the deceased employee, thus doing away with the minimum vesting requirement.

Further, various disclosure requirements had been prescribed under SEBI Circular dated June 16, 2015, relating to contents of the trust deed, terms and conditions to be formulated by the compensation committee, matters to be stated in the explanatory statement, disclosure to stock exchanges and by the board of directors, etc. The said disclosures have been incorporated under the New Regulations as part C to the Schedule-I with certain additional disclosures like period of lock-in and terms & conditions for buyback, if any, of specified securities covered under these regulations.


15.Vesting of benefits on retirement or superannuation

Explanation as added to the Regulation 9(6) under the New Regulations stipulates that where employment is ceased due to retirement or superannuation then options, SAR or any other benefits granted to an employee would continue to vest in accordance with their respective vesting schedules even after retirement or superannuation in accordance with company policies and applicable law.

The whys and wherefores: Regulation 9(6) of the erstwhile SBEB Regulations stipulated that in case of cessation of employment on account of resignation or termination, benefits which are granted and not vested as on that day shall expire. However, there was a confusion as to the applicability of the concerned provision in case of cessation due to other reasons. In order to bring clarity, the Expert Group recommended that cessation of employment on account of retirement or superannuation should be left out of the ambit of regulation 9(6). In order to provide leniency in special circumstances, it is now explicitly inculcated in the New Regulations that the options, SAR or any benefits granted to an employee and not yet vested would not expire on cessation of employment due to retirement or superannuation and the same will continue to vest in accordance with the vesting schedule.

16. Cashless Exercise

The New Regulations, like the erstwhile SBEB Regulations, do not specifically define the term ‘cashless exercise’ however, have prescribed certain transactions which shall be covered under the ambit of cashless exercise. Regulation 3(15)(a) of the New Regulations stipulate that following is the process pursuant to which cashless exercise may be undertaken:

  1. to enable the employee to fund the payment of the exercise price,
  2. To enable the employee to fund the payment of the amount necessary to meet his/her tax obligations and other related expenses pursuant to exercise of options granted under the ESOS.

The whys and wherefores: Since the term ‘cashless exercise’ was not defined under the erstwhile SBEB Regulations, the Expert Group was of the view that a clarity w.r.t the ambit of transactions that would be covered under the concerned term would be helpful and accordingly, the present change is introduced.

17. Changes pertaining to provisions of sweat equity shares

The New Regulations have combined the SBEB Regulations with the SEBI (Issue of Sweat Equity) Regulations, 2002. Under the New Regulations, there are certain changes introduced with respect to the provisions relating to sweat equity shares.

  1. Purpose of issuance of sweat equity shares: The purpose of issuance of sweat equity shares was not previously specified under the erstwhile regulations. Regulation 30 of the New Regulations provides for permitted purpose/objective for issuance of sweat equity shares which are in accordance with the current provisions of the Companies (Share Capital and Debentures) Rules, 2014.
  2. Maximum quantum of shares: Vide a newly inserted provision, the New Regulations under regulation 31 have prescribed for a maximum limit on the quantum of sweat equity shares that may be issued by a listed company. The regulations have prescribed a cap of 15% of the existing paid up capital on the issuance done in a year and further state that the total quantum of sweat equity shares issued by a company shall not exceed 25% of the paid up equity capital at any time. This is in line with the Companies (Share Capital and Debentures) Rules, 2014.

Further, the New Regulations provide for relaxation with respect to quantum of sweat equity to be issued by companies which are listed on Innovators Growth Platform i.e the overall limit of 50% of the paid-up equity share capital of the company at any time upto 10 (ten) years from the date of its incorporation or registration.

  1. Lock-in requirement: Regulation 38 of the New Regulations has made the lock-in period for equity shares issued under sweat equity consistent with the lock-in period prescribed in relation to preferential issue under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). The rationale for the change is to make sweat equity shares more attractive, by doing away with the lock-in period of 3 (three) years under the erstwhile regulations.
  2. Pricing: The erstwhile provisions prescribed for a specific mechanism for determination of price of sweat equity shares, which stated the higher amount of the average of weekly high and low prices of the period as specified was to be considered. However, the pricing mechanism of sweat equity shares has now been aligned with the provisions relating to preferential issues under ICDR Regulations by the New Regulations via Regulation 33.

The whys and wherefores: The new Regulations have now provided clarity that companies may issue sweat equity shares only for the prescribed purposes. Further, by specifying the quantum of sweat equity shares that can be issued, the New Regulations have inculcated a clarity and increased the scope of compliance.

18. Definition of “Promoter Group Company” and its impact throughout the Regulations

The erstwhile SBEB Regulations [regulation 2(1)(v)] while referring to the definition of promoter group under the ICDR Regulations, stated that in case the promoter or promoter group is a body corporate, the promoters of such body corporates shall also fall under the ambit of the definition. Regulation 2(1)(dd) of the New Regulations has omitted the said proviso, thus making it in line with the definition as stated under ICDR Regulations.

Recommendations that couldn’t form part of the New Regulations

There were certain recommendations of the Expert group that were discussed, however, the same were not made part of the New Regulations since majority of them did not stand the test of necessity for inclusion. These include:

  1. Inclusion of trust shareholding under the ambit of public shareholding.
  2. Explicit recognition of employee stock options under managerial remuneration under the New Regulations.
  3. Relaxation of compliances for trust under SEBI (Prohibition of Insider Trading) Regulations, 2015.
  4. Approval of stock exchange for acquisition by trust via secondary acquisition.
  5. Delegation of responsibilities by compensation committee pertaining to approval of schemes and other matters.
  6. Specification of pricing guidelines or disclosure requirements for determination of exercise price.























Dividend restrictions on NBFCs

– Financial Services Division (


The Reserve Bank of India (RBI) vide a notification dated 24th June, 2021[1] imposed restrictions on distribution of dividends by non-banking financial companies (‘Notification’). The restrictions cover both systemically important NBFCs as well non-systemically important ones. The guidelines have been issued in line with the draft guidelines for the declaration of dividends by NBFC issued in December 2020.

Restrictions on dividend payout essentially force financial sector entities to plough back a minimal part of their profits, and therefore, result in creation of a profit conservation. Such restrictions are common in case of financial institutions world-over, and are also imbibed as a part of Basel III capital adequacy requirements. Similar restrictions exist in case of banking entities[2]. In case of NBFCs, such restrictions were proposed by the RBI vide Draft Circular on Declaration of Dividend by NBFCs dated December 9, 2020[3].

Dividend Payout Ratio (DP Ratio) is an important policy measure for companies for shareholder wealth maximisation. A conservative dividend distribution policy ensures churning of profits thereby ensuring organic growth of the net worth, and assisted by leverage, a return on shareholders’ funds higher than what the shareholders can fetch on distributed money. On the other hand, aggressive dividend distribution policy entails that profits be returned to the shareholders as there are less business investment opportunities, thus wealth of shareholders be returned. The foregoing arguments does not encompass stictict dividend payout criteria, but a broad policy objective which organisations seek to achieve.

However, in the case of financial institutions like Banks and NBFCs  the motivation of regulators to limit the dividend payout is from the perspective of prudential regulation. The limit on dividend distribution allows regulators to ensure that adequate capital conservation buffers are maintained at all times by the financial institutions.

Most NBFCs follow very conservative dividend policies, and based on publicly available data, the DP Ratios of some of the NBFCs for FY 2019-20 are as follows:

  1. Manappuram- 18.86%
  2. Cholamandalam- 12.78%
  3. Bajaj Finserv- 11.93%
  4. Muthoot Finance- 19.91%
  5. Tata Capital Financial Services- 32.96%
  6. DCM Shriram- 17.19%


Who all are covered?

The opening statement of the Notification provides that the Notification is applicable on all NBFCs regulated by RBI. Further, reference is made to the term ‘Applicable NBFCs’  as defined under the respective RBI Master Directions on NBFC-ND-SI and NBFC-ND-NSI. The concept of Applicable NBFC is relevant to determine the applicability of the provisions of the aforesaid RBI Master Directions. Accordingly, it can be understood that, along with the ‘Applicable NBFCs’, the following categories of NBFCs shall be covered under the ambit of the Notification-

  1. Housing Finance Companies (HFCs),
  2. Core Investment Companies (CICs),
  3. Government NBFCs,
  4. Mortgage Guarantee Companies,
  5. Standalone Primary Dealers (SPDs),
  6. NBFC-Peer to Peer Lending Platform (NBFC-P2P)
  7. NBFC- Account Aggregator (NBFC-AA).
  8. NBFC-D (deposit taking NBFCs)
  9. NBFCs-ND (non-deposit taking NBFCs) (both SI and NSI)
  10. NBFC-Factor (both SI and NSI)
  11. NBFC-MFI (both SI and NSI)
  12. NBFC-IFC (both SI and NSI)
  13. IDF-NBFC

However, it is to be noted that For NBFCs that do not accept public funds and do not have any customer interface no limit has been imposed with regards to the dividend payout ratio.

Effective from which financial year?

Effective for declaration of dividend from the profits of the financial year ending March 31, 2022 and onwards.

Which all dividends are covered?

Proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares. However, other than CCPS, dividends declared on preference shares are not included under the Notification.

Note that the issue of bonus shares is, in essence, capitalisation of profits, and therefore, is not affected by the present requirement.

Computation of dividend payout ratio:

Besides the upfront conditionalities such as capital adequacy ratio, leverage ratio, etc., the stance of the present Notification is limitation on dividend payout ratio. Hence, the meaning of the DP ratio becomes important.

The Notification defines the same as :

‘the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed.’

As we discussed elsewhere, the word “dividend” shall be restricted to only equity and CCPS dividend. Hence, dividend on redeemable preference shares shall be excluded.

Also note that the word “profit for the year” refers to profits after tax. There is no question of adding the brought forward profits of earlier years, whether parked in reserves or retained as surplus in the profit and loss account.

In case of companies adopting IndAS, there are always questions on what constitutes distributable profits – whether the gains or losses on fair valuation, taken to P/L are a part of the distributable profits or not. The relevant provisions of the Companies Act, viz., proviso to sec. 123 (1) shall have to be borne in mind.

Eligibility Requirement and Quantum Restrictions

Category Eligibility Requirement Quantum*
NBFCs (including SDPs) meeting prudential requirements ●  Complies with applicable regulatory capital adequacy requirements/leverage restrictions/Adjusted net-worth for each of the last three financial years including the financial year for which the dividend is proposed

○ For SPDs, minimum CRAR of 20% to be maintained for the financial year for which dividend is proposed.

● Net NPA ratio shall be less than 6% in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.

○ Calculation of NNPA

● Complies with the provisions of Section 45 IC of the RBI Act/ Section 29 C of the NHB Act, as the case may be, that is to say, has transferred 20% of its net profits to the regulatory reserve fund

● No explicit restrictions placed by the regulator on declaration of dividend

●  Type I NBFCs- No limit

●  CICs and SPDs- 60%

●  Other NBFCs- 50%

NBFCs (other than SPDs) not meeting prudential requirements ● Complies with the applicable capital adequacy requirements/ leverage restrictions in the financial year for which dividend is proposed to be paid

● Has net NPA of less than 4% as at the close of the financial year.




As regards NBFC-ND-NSI, the applicable regulatory capital requirement, as mentioned in Annex I[4] of the Notification,  seems to suggest that if there is a breach of leverage ratio at any time since 2015, the NBFC is disqualified. This however, does not seem to be the intent of the regulator. The meaning of the aforesaid restriction should be that the provision became applicable from 2015; however, it should not be leading to a conclusion that a dividend distribution will ensure that there is no breach of leverage ratio at any time in the history of the said NBFC. We are of the view that each of the ratios (CRAR or Leverage of Adjusted Net worth, as the case may be) need to be observed ideally at the time of distribution (last three FYs including the year for which dividend is declared), and even conservatively, during the year in question.

*The Notification has prescribed the same limits on quantum for a certain class of NBFCs, however, the draft guidelines had prescribed the limits based on the CRAR or adjusted net-worth of the NBFCs. (Refer Annex I of draft guidelines)

Reporting Requirements

NBFC-D, NBFC-ND-SIs, HFCs & CICs declaring dividend shall report details of dividend declared during the financial year as per the prescribed format within a fortnight after declaration of dividend to the Regional Office of the RBI/Department of Supervision of NHB, as the case may be.

There seems to be a lack of clarity w.r.t. the disclosure requirement for NBFC-MFIs and NBFC-IDFs. Though they are covered under the definition of ‘Applicable NBFCs’ under the RBI Master Directions, however, they are not generally classified as NBFC-ND-SI. Hence, whether the disclosure requirement is applicable to them or not seems to create confusion. In our view, going by prudence, this must be adhered to by such systemically important MFI and IDFs as well.

Accordingly, it can be inferred that the disclosure requirements shall not be applicable to following:

  • Mortgage Guarantee Companies,
  • Standalone Primary Dealers (SPDs),
  • NBFC-Peer to Peer Lending Platform (NBFC-P2P)
  • NBFC- Account Aggregator (NBFC-AA).

Comparison with the dividend regulations on Banks

Criteria Bank NBFCs
Eligibility Only those banks would be eligible to declare dividends who have a CRAR of at least 9% for preceding two completed financial years and the accounting year for which it proposes to declare dividend and Net NPA less than 7% NBFC-ND-NSI with leverage upto 7 times and NBFC-ND-SI with a CRAR of not less than 15% for last three years (including the FY for which dividend is declared) and Net NPA less than 6% in each of the last three years
In case not meeting eligibility In case any bank does not meet the above CRAR norm, but has a CRAR of at least 9% for the accounting year for which it proposes to declare dividend, it would be eligible to declare dividend provided its Net NPA ratio is less than 5% In case any NBFC does not meet the above eligibility criteria for each of the previous three FY, but meets the capital adequacy for the accounting year, for which it proposes to declare dividend and has a Net NPA ratio of less than 4% at the close of the FY, it shall be allowed to declare dividend, subject to a maximum of 10% on the DP ratio.
Quantum Dividend payout ratio shall not exceed 40 % and shall be as per the prescribed matrix


CIC’s and SPDs shall ensure the maximum dividend payout ratio does not exceed 60%, while the other NBFCs shall not exceed 50% of the DP ratio. For Type I NBFCs there is no limit.
Reporting All banks declaring dividends should report details of dividend declared during the accounting year as per the proforma furnished by RBI NBFC-Ds, NBFC-ND-SIs, HFCs & CICs declaring dividend should report the details of dividend within a fortnight after declaration of dividend to RBI/NHB, as may be applicable.

Immediate Actionables

NBFCs, who already have a Dividend Distribution Policy in place, may have to amend the policy in line with the Notification. As per SEBI LODR Regulations, top 1000 listed companies are mandatorily required to have a dividend distribution policy.  Further, NBFCs may also have voluntarily adopted a policy.

The dividend distribution policy includes the following parameters:

  • the circumstances under which the shareholders may or may not expect dividend;
  • the financial parameters that shall be considered while declaring dividend;
  • internal and external factors that shall be considered for declaration of dividend;
  • policy as to how the retained earnings shall be utilized; and
  • parameters that shall be adopted with regard to various classes of shares

The eligibility requirements and limits on quantum of dividend, as provided in the Notification,  may be additional criterias for such NBFCs to declare dividend. In such a case, the existing dividend distribution policy shall be required to be amended in order to include the additional parameters.

It is noteworthy here that, as per regulation 43A of the LODR, if a listed entity proposes to amend its dividend distribution policy, it shall disclose the changes along with the rationale for the same in its annual report and on its website.


[2] and other associated circulars




Our related write-ups:

Our presentation on dividends –


SEBI notifies substantial amendments in Listing Regulations

Proposals approved in SEBI BM of March, 2021 made effective

Payal Agarwal | Executive  ( )                                                                                                      May 07, 2021


SEBI, the capital market regulator of India, vide a gazette notification dated 06th May, 2021 notified Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021 [“the Amendment Regulations”] that were approved in SEBI’s Board Meeting held on March 25, 2021. Most of the amendments were already rolled out earlier as consultation papers in 2020. The amendments become effective from May 06, 2021.

This article discusses the major amendments carried out and the likely impact and actionable for the listed entities.

Brief of the amendments are as follows –

A gist of all the amendments under the Amendment Regulations have been captured in a snippet.

1.     Applicability of the Listing Regulations

In terms of Regulation 3 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2013 (‘Listing Regulations’) the provisions of Listing Regulations are applicable to entities that list the designated securities on the stock exchange.

The Amendment Regulations clarify that the applicability of certain provisions of Listing Regulations based on market capitalisation will continue to apply even where the entities fall below the prescribed threshold.

While the market capitalisation may be derived for any day, the recognised stock exchanges viz. BSE Limited and National Stock Exchange of India Limited releases a list of listed entities based on market capitalisation periodically. However, the provisions under Listing Regulations become applicable based on market capitalisation as at the end of the immediate previous financial year.

The present amendment on the continuation of applicability of provisions even after the listed entity ceasing to be among the top 500, 1000, 2000 listed entities, as the case may be, seems inappropriate. The applicability of these provisions were originally introduced in view of the size of the listed entities that held major market cap. Indefinite applicability of the said provisions despite fall in the market capitalisation of the listed entity is more of a compliance burden. The provision should be amended by SEBI in line with the timeframe provided under Reg. 15 i.e. where a listed entity does not fall under the list of top 100, 500, 1000, 2000 for three consecutive financial years, the compliance requirement should cease to apply.

Therefore, a conjoint reading of both the provisions should be allowed to take a liberal interpretation in respect of the newly-inserted Regulation 3(2) as well, thereby relaxation of compliance requirements on completion of a look-back period of 3 consecutive financial years.

2.     Risk Management Committee

Regulation 21 of Listing Regulations requires the listed entities to constitute a Risk Management Committee (RMC).  A comparative study of the erstwhile and the amended provisions w.r.t RMC is given below –

Topic Erstwhile provisions Amended provisions
Applicability of RMC ·       On top 500 listed entities (Based on market capitalisation) ·       On top 1000 listed entities based on market capitalisation
Composition ·       Members of Board of Directors

·       Senior executives of listed entity

·       2/3rds IDs in case of SR Equity Shares

·       Minimum 3 members

·       Majority being members of board of directors

·       Atleast 1 Independent Director (ID)

·       2/3rds IDs in case of SR Equity Shares

Minimum no. of meetings One Two
Quorum Not specified ·    2 or 1/3rds of total members of RMC, whichever is higher

·       Including atleast 1 member of Board

Maximum gap between two meetings Not specified Not more than 180 days gap between two consecutive meetings
Roles and responsibilities The board of directors were to define the role and responsibility and delegate monitoring and reviewing of the risk management plan and such other functions, including cyber security. As provided under Part D of Schedule II, that inter alia  includes:

·       Formulating of risk management policy;

·       Oversee implementation of the same;

·       Monitor and evaluate risks basis appropriate methodology, processes and systems.

·       Appointment, removal and terms of remuneration of CRO.

Power to seek Information No such power. The same was only available with Audit Committee under Reg. 18 (2) (c). RMC has powers to seek information from any employee, obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers necessary.

The roles and responsibilities of the RMC has now been specified in the Regulations itself, which were once left at the discretion of Board. The formulation of Risk Management Policy has also been delegated to the RMC, with particular contents of the policy being specified under the Schedule.

An important role of the RMC, among others, include review of the appointment, removal and terms of remuneration of Chief Risk Officer (CRO). The appointment of CRO is not a mandatory requirement under Listing Regulations. CRO is required to be appointed for all banking companies, and non-banking financial companies (NBFCs) having asset size of Rs. 50 billions or more, being registered as an Investment and Credit company, Infrastructure Finance Companies, Micro Finance Institutions, Factors, or Infrastructure Debt Funds. Further, the Insurance Regulatory and Development Authority of India (IRDAI) Corporate Governance Guidelines requires the insurance companies to appoint CRO.

The role of RMC further provides for co-ordination with other committees where the roles  overlap. It is seen that the risk management function is also laid upon the Audit Committee. Therefore, the roles of both the committees might be overlapping. In view of the same, some companies choose to constitute one joint committee combining the roles of both Audit Committee and RMC.  From the provisions providing for co-ordination of activities, it may also be taken as a clear indication that the committees cannot be merged into one, but co-ordinate where the activities require so.

Actionables –
  • Changes in the constitution of RMC / Constitution of RMC in case of first-time applicability;
  • Modification of the Risk Management Policy as per the Amendment Regulations;
  • Amending the existing charter of the Committee to align with the amendments.

While the Amendment Regulations are effective immediately, the changes cannot take place overnight. Therefore, it is advisable that the listed entities shall take the matter of constitution/ re-constitution of RMC in the ensuing Board Meeting.  The modification of Risk Management Policy will be then taken up by the RMC and can be done within a reasonable period of time.

What should be this period? A probable answer to this should lie in the proviso to clause (a) of Reg. 15 that permits a timeline of six months from the applicability to comply with corporate governance requirements as stipulated under regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and para C, D and E of Schedule V. However, that is applicable only in case of companies covered in Reg. 15 (2) (a). Therefore, the time available is till June 30, 2021 as thereafter, the companies will be required to confirm on RMC composition in the quarterly filings done under Reg. 27.

3.     Overriding powers of LODR Regulations

Earlier, proviso to Regulation 15(2)(b) provided a clear stipulation of overriding effect of specific statute in case of conflicting provisions. The Amendment Regulations provides for deletion of the said proviso effective from September 1, 2021. No rationale seems to have been provided in the agenda[1] put up before SEBI at the board meeting for this major amendment.

Regulators viz. RBI, IRDA, PFRDA at times have specific corporate governance related compliances that are stricter and at times conflicting with the requirements of Listing Regulations. For eg. With respect to composition of Audit Committee for a public sector bank, RBI Circular of September, 1995 provides for following composition in case of public sector banks: (a) Executive Director of the Bank (Wholetime director in case of SBI) (b) two official directors (i.e. nominees of Government and RBI) and (c) Two non-official, non-executive directors (at least one of them should be a Chartered Accountant). Directors from staff will not be included in ACB. This is certainly conflicting with the composition provided in Reg. 18 of Listing Regulations.

Subsequent to September 1, 2021 these entities will be regarded as non-compliant of the provisions of Listing Regulations and may be subject to penalty in terms of SEBI Circular dated January, 2020.

4.     Reclassification of promoters into public – related exemptions and procedural changes

Regulation 31A of the LODR Regulations specifies the conditions and approvals post which the promoters can be re-classified into public shareholders. SEBI had proposed changes to the same in a consultation paper dated 23rd November, 2020. The consultation paper was critically analysed in our article. Amendments have been made on similar lines in Regulation 31A.

5.     Alignment with the provisions of the Companies Act, 2013

Certain amendments have been made to remove the gap between the provisions of LODR Regulations, with that of the Companies Act, 2013 as given below –

  • Separate meeting of independent directors – The requirement of conducting a separate meeting of the independent directors without the presence of any other member of the Board of the company is required under both the Companies Act, 2013 as well as the LODR Regulations. However, whereas the Companies Act requires one meeting in a financial year, the LODR Regulations required one meeting in a year (calendar year). Therefore, the same has been substituted with a “financial year” so as to align the requirements of both the governing laws.
  • Display of Annual Return on website – Section 92 read with allied rules requires the companies, having a website, to display its Annual Return on the website. New clause has been inserted under Regulation 46 of LODR Regulations that requires placing the Annual Return on the website of the company.
  • Changes in requirements pertaining to placing of financial statements on website – The audited financial statements of each of the subsidiaries was required to be  placed on the website prior to the Amendment Regulations. New provisos has been inserted under the same so as to avoid preparation of separate financial statements of the subsidiary company, where the requirements under the Companies Act, 2013 are met if the consolidated financial statements are placed instead of separate ones.

6.     Mandatory website disclosures

Regulation 46 of the LODR Regulations provides the mandatory contents to be placed on the website of a listed entity. Most of the disclosures were already existing under respective regulations viz. Reg 30, 43A etc. However, the same has been consolidated under regulation 46. This will now enable stock exchanges to levy penalty in terms of SEBI circular dated 22nd January, 2020.

7.     Analyst meet

The listed entity is required to disclose the schedule of analyst or institutional investor meet and the presentations made to them on its website under regulation 46 and on the website of the stock exchange under Schedule III. The Amendment Regulations have explained the term ‘meet’ to mean the group meetings and calls, whether digitally or by physical means. The Amendment Regulations will require the listed entity to upload the audio/ video recordings and the transcripts within the prescribed timeframe. The same is in line with SEBI’s Report on disclosures pertaining to analyst meets, investor meets and conference calls. However, the amendment does not cover disclosure of one-to-one investor/ analyst meet conducted with select investors recommended in the said Report.

8.     Consolidation of various SEBI circulars

Certain circulars of SEBI lay down various requirements to be complied with in relation to the LODR Regulations. The Amendment Regulations have consolidated the requirements under the principal LODR Regulations.

  • Requirement of Secretarial Compliance Report – While the requirement of Annual Secretarial Compliance report were applicable on the listed entities and its material subsidiaries since a few years back, the same has now been specifically provided under newly inserted sub-regulation (2) of Regulation 24A. Earlier, the practice came pursuant to a SEBI circular.
  • Timeline for report of monitoring agency regarding deviation in use of proceeds – Pursuant to the requirements of Regulation 32 of the LODR Regulations, the monitoring agency is required to give a report on the utilisation of proceeds of issue on a quarterly basis. While timelines were not specified in the LODR Regulations, the report was required to be given within 45 days from the end of the quarter. This timeline was pursuant to the SEBI circular dated 24th December, 2019 . Now, with the Amendment regulations, the same is specified under regulation 32(6) of the LODR Regulations.
  • Requirement of Business responsibility and sustainability report (BRSR)- SEBI had proposed a new format to replace the existing Business Responsibility Report. The proposal was finalised and the BRSR format has been made mandatorily applicable from FY 2022-23 onwards, vide SEBI circular dated April, 2021 . The same has also been consolidated under Regulation 34 of the LODR Regulations. A detailed discussion on BRSR is covered in our article.


The Amendment Regulations are very crucial and significant in nature. While on one hand, certain provisions are aligned with the Companies Act, 2013, whereas on the other hand, overriding powers have been given to LODR Regulations which will require the listed entities formed under special statute to comply with the LODR Regulations in entirety. Uniformity in timelines and relaxation in certain disclosure requirements will encourage ease of doing business, and the coverage of certain provisions extended to listed entities based on market capitalisation will have a remarkable impact on the corporate governance of listed entities.


Our other materials on the relevant topic can be read here –


SEBI extends deadline for June quarter results amid COVID-19

Companies to manage the dual requirement of holding board meetings and submission of financial results

Shaifali Sharma
Vinod Kothari & Company

In the wake of the continuing impact of COVID-19 pandemic, SEBI vide circular[1] dated June 24, 2020, granted relaxation to listed entities and extended the timeline for submission of financial results for quarter / half year / financial year ended March 31, 2020 to July 31, 2020.

Since, now the first quarter of the FY 2020-21 has come to an end, companies are expected to finalize, approve and submit their financials to the respective stock exchange(s) within 45 days from the quarter ended June 30, 2020 as per Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) i.e. on or before August 14, 2020.

Considering the shortened time gap of 14 days between the two due dates stated above i.e. July 31 and August 14, SEBI vide its circular[2] dated July 29, 2020, has extended the deadline to submit financial results for the first quarter from August 14 to September 15, 2020 thereby allowing additional 32 days to the listed companies which will in turn provide extra time to companies and its auditors working on reporting the quarterly financial results.

It is pertinent to note here that the board of directors, as per Regulation 17(2) of the Listing Regulations, must meet at least four times a year, with a maximum time gap of 120 days between any two meetings. In this regard, the SEBI vide circular[3] date June 26, 2020 had exempted the listed entities from observing the stipulated time gap between two board meetings for the meetings held/proposed to be held between the period December 01, 2019 and July 31, 2020.

Considering no further extension has been granted by SEBI yet, the board meeting for approving the financial results should be scheduled keeping in mind the maximum time gap of 120 days prescribed under the Listing Regulations. For example, if we take a case of a listed company which held its last board meeting on May 02, 2020, the next board meeting shall be scheduled on or before August 31, 2020  instead of the extended due date of September 14, 2020.

As regards for unlisted companies, the maximum time gap for conducting board meetings had been relaxed vide MCA circular[4] dated March 24, 2020 to 180 days from present 120 days for the first two quarters of FY 2020-2021.





Other reading materials on the similar topic:

  1. ‘COVID-19 – Incorporated Responses | Regulatory measures in view of COVID-19’ can be viewed here
  2. ‘Resources on virtual AGMs’ can be viewed here
  3. Our other articles on various topics can be read at:

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Shareholder scrutiny for payout under Listing Regulations to directors

– Understanding the capping rationale

Pammy Jaiswal | Partner

Shaifali Sharma | Assistant Manager

Vinod Kothari and Company;


The remuneration payable to the directors of a public company is regulated by the provisions of Section 197 read with Schedule V of the Companies Act, 2013 (Act). It provides a ceiling on the maximum remuneration that can be paid to the directors both in aggregate as well categorically, including Whole-time Director, Managing Director and the Manager.

Any payment to such directors within the said limits has to be approved by the shareholders by way of an ordinary resolution. Payment of remuneration in excess of the limits requires approval of the shareholders by way of a special resolution.

There were no specific provisions prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) on maximum remuneration payable to directors of listed entities until SEBI, on the basis of recommendation of Kotak Committee on Corporate Governance, amended the Listing Regulations to put a ceiling on remuneration payable to executive promoter directors and non-executive directors.

This article tries to critically analyze the intent and deduce the interpretation of the aforesaid capping under the Listing Regulations.

Absolute versus relative limits- reading between the lines

Regulation 17 (6) (e) of the Listing Regulations reads as under:

“The fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if-

(i) the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or

(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity:

Provided that the approval of the shareholders under this provision shall be valid only till the expiry of the term of such director.

Explanation: For the purposes of this clause, net profits shall be calculated as per section 198 of the Companies Act, 2013.

On the very first reading of Regulation 17 (6) (e), we understand that in case the listed company has one executive promoter director, it can pay upto 2.5% of the net profits or INR 5 crore, whichever is higher, without passing a special resolution.

In case of more than one such director in the company, the relative limit of 2.5% is doubled to 5% of the net profits, however, the absolute limit of INR 5 crore has not been mentioned under sub-clause (ii) of the said sub-regulation.

This makes it all the more important for us to read between the lines and interpret the meaning as intended by the law-makers. As mentioned, the first sub-clause provides both a relative and an absolute limit for the purpose of securing shareholder scrutiny. In fact, the said clause clearly mentions that higher of the relative or absolute limit has to be considered while determining the need to approach the shareholders.

Accordingly, it may seem to be an incorrect reading if companies consider only the relative limit for the second sub-clause. In such a scenario, companies may end up considering a far lower limit than INR 5 crores which the law makers have already fixed for one promoter executive director in the first sub clause.

Approval requirements under the Act viz-a-viz requirements under Listing Regulations


A. Payment of remuneration to executive promoter directors of a listed public company

As per the Report[1] of the Kotak Committee constituted by SEBI, several cases of disproportionate payments made to executive promoter directors as compared to other executive directors were noted and therefore, the Committee with the view to improve the standards on Corporate Governance, suggested that this issue should be subjected to greater shareholder scrutiny. Accordingly, the amendment carved a parallel way for obtaining shareholder’s approval if the total remuneration paid to executive promoter director exceeds the prescribed limits.

The above recommendation has already come into effect from April 01, 2019 and therefore the listed entities, in addition to the threshold limits prescribed u/s 197 of the Act, have to adhere to the ceiling laid down u/r 17(6)(e) of the Listing Regulations.

Below is the comparison of the threshold limits prescribed under Act and Listing Regulations for payment of remuneration to executive promoter director, in excess of which shareholders’ approval by special resolution shall be required:

Special Resolution required if: Under the Companies Act, 2013 Under SEBI Listing Regulations
Remuneration payable to a single executive director* Exceeds 5% of the net profits of the company Exceeds Rs. 5 crore (absolute limit) or 2.5% of the net profit (relative limit), whichever is higher
Remuneration payable to all executive director* Exceeds 10% of the net profits of the company Exceeds 5% of the net profits of the company

* Listing Regulations caps the limit for executive directors who are promoters or members of promoter group

From above, it is evident that the Act allows public listed companies to pay remuneration to its executive directors upto 5% or 10% of its net profits, as the case may be, (without passing special resolution) which is double the relative thresholds prescribed under Listing Regulations i.e. 2.5% or 5% of the net profits.


Illustration 1 –Payment within the limits laid down under the Act and also Listing Regulations

Type of shareholder approval required – Ordinary resolution under the Act

Illustration 2-Payment exceeds Listing Regulations limits but is within limits of the Act

Let us take a numerical example for this case:

Situation Permissible remuneration to a single executive promoter director Permissible aggregate remuneration to more than 1 executive promoter directors
Company has profits of 10 crore


·    5% of NP





0.5 crore

Higher of

·    2.5% of NP; or

·    5 crore


5 crores

·    10% of NP





1 crore

·    5% of NP





0.5 crore



In case of single executive promoter director: 

  • Permissible remuneration under Listing Regulations  (5 crore) is much higher than amount (0.5 crores) under the Act. In such cases, there is a clear cut conflict between the two legislations. On one hand where Listing Regulations  allows payment upto INR 5 crores to one such director (which in this case constitutes 50% of the NP), the company in question will be required to pass SR under the Act.
  • Accordingly, providing for a higher payout amongst the relative and absolute limit, in the first sub-clause does not seem to achieve the intent of SEBI to increase the Corporate Governance standards by scrutinizing disproportionate payments to this category.

In case of more than 1 executive promoter director:

  • As soon as we move to second situation, the amount available for payment of remuneration stands reduced drastically. The permissible remuneration under Listing Regulations will be INR 0.5 crore whereas, the Act allows payment upto INR 1 crore.

Illustration 3 – Payment exceeds the limits under the Act and automatically exceeds the limits under Listing Regulations (not considering the absolute limit)

Here the case is simple, SR is required to be passed.

Illustration 4 – Company has inadequate profits for the purpose of section 197 read with Schedule V of the Act

In case the minimum remuneration approved falls within the limits provided against the effective capital – OR is sufficient, however, for the purpose of Listing Regulations, SR will be required. In this case, Listing Regulations are stricter as it does not envisage inadequacy of profits and amounts that can be paid in case inadequacy.

However, if the minimum remuneration approved exceeds the limits provided against the effective capital, SR is required under the Act and such payment can be made only for three financial years with certain other disclosure requirements.

Having said that, it is important to note that once SR under the Act has been passed for payment of remuneration either in cases of adequate or inadequateprofits, there does not seem to be any need to pass another SR under Listing Regulations  for breach of the limits set therein.


B. Payment of remuneration to non-executive directors of a listed public company

The Kotak Committee on corporate governance further observed that certain non-executive directors (NEDs) (generally promoter directors) are receiving disproportionate remuneration from the total pool available for all other NEDs and recommended that if remuneration of a single NED exceeds 50% of the pool being distributed to the NEDs as a whole, shareholder approval should be required.

SEBI, in line with the above proposal and the requirement for special resolution for executive promoter directors, amended Listing Regulations and inserted following clause (ca) to Regulation 17(6):

“The approval of shareholders by special resolution shall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof”

The above amendment has also come into effect from April 01, 2019 and therefore, requires an action on the part of the listed entities to pass SR for such disproportionate payment to any one of its NED.

Some companies have already passed an SR in the AGM held for the financial year 2018-19 while other companies are preparing to pass the same in this year. The reason behind such two school of thoughts is based on the following reasons:

  1. Remuneration to a single NED for the FY 2018-19, which is basically profit linked commission, has been paid after 1st April, 2019. Some companies which have already taken the SR in the AGM held for the FY 2018-2019 have done so considering the payment being done post the advent of the aforesaid amendment.
  2. Remuneration to a single NED for the FY 2019- 2020 will be taken to the shareholders if it exceeds the limits. Here the companies which did not approach its shareholders in the AGM held for the FY 2018-2019 is based on the understanding that this amendment has come into force from 1st April, 2019 which means the same is to be complied with for the remuneration payable for FY 2019-2020. Therefore, according to the second school of thought, no SR is required for the disproportionate payment made in FY 2019-2020 for the FY 2018-2019[2].

Concluding Remarks

While the amendment of capping the limits for payout to executive promoter directors does not seem to meet the intent of the law makers, the amendment for passing SR for disproportionate payout to a single NED seems to be much more justified.

It was rightly mentioned in the Kotak Committee report that in future SEBI could review the status of the amendment relating to payout to executive promoter directors based on experience gained. As per the discussions above, it is imperative to draw attention firstly to the absence of the absolute limits in the second sub-clause of this sub-Regulation and even though the same is read with by inserting the same, it may seem to be futile for sole reason of SRs already passed by the companies under the Act. Further, clarity is needed for requirement to seek approval for payment of minimum remuneration in case of inadequacy of profits.

Since, MCA had already prescribed the limits and procedures under the Act for managerial remuneration, SEBI may relook at the capping scrutinylaid down for executive promoter directors and possible could align the same with the provisions of the Act. The intent is not to simply seek special resolution for every item of managerial remuneration as abundant caution.

Other reading materials on the similar topic:

  1. ‘FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018’ can be viewed here
  2. Presentation on ‘Appointment & Remuneration of Managerial Personnel & KMPs’ can be viewed here
  3. ‘Managerial Remuneration: A five decades old control cedes’ can be viewed here
  4. ‘Remunerating NEDs and IDs in low-profit or no-profit years’ can be viewed here
  5. Our other articles on various topics can be read at:

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[2]Read our related article on the topic, here

Disparity gazes out in reporting utilisation

-Format indicates mandatory reporting by all listed entities

Pammy Jaiswal |


Listed entities raise funds by way of public issue, rights issue, preferential issue and qualified institutional placement of specified securities or by way of public issue or private placement of debt securities. In each of the case, there is an offer document wherein objects of the issue are required to be specified.  There may be a categorised allocation that may be stated in the offer document with respect to objects of the issue. It is likely that a company may either end up using certain amounts for objects not stated in the offer document or beyond category wise limit specified. Utilisation of proceeds is monitored by the Audit Committee and also by the monitoring agency appointed in terms of SEBI ICDR Regulations, where required.

Reg. 32 (2) as well as Reg. 52 (7) of the SEBI Listing Regulations requires the listed entities to report the deviation and material deviation, respectively, in utilisation of the proceeds raised through corporate actions specified above.  Under Reg 32, the statement of deviation is required to be submitted on a quarterly basis; while Reg. 52 (7) mandates submission of along with half yearly financial results.

While the reporting requirement was there under clause 43A of the Equity Listing Agreement, there was no format for such reporting till December, 2019.

The format of the reporting was issued by SEBI under Reg. 32 (2) on 24th December, 2019[1] and thereafter under Reg. 52 (7) on 17th January, 2020[2]. This article highlights the deviation in the provisions and format and the practical issue faced by listed entities.

Contradiction in the provisions

Relevant extracts of Reg. 32 (applicable to companies with specified securities listed):

“(1) The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc. ,-

(a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;

(b) indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds.


Relevant extracts from Reg. 52 (applicable to companies with debt securities or NCRPS[3] listed):

“ (7) The listed entity shall submit to the stock exchange on a half yearly basis along with the half yearly financial results, a statement indicating material deviations, if any, in the use of proceeds of issue of non-convertible debt securities and non-convertible redeemable preference shares from the objects stated in the offer document.”

Chapter VI of the Listing Regulations is applicable on entities which have listed their specified securities as well as NCDs or NCRPSs or both.

Relevant extracts from Reg. 63 (2) (applicable to companies having specified securities and either debt securities or NCRPS[4] or both listed):

(2) The listed entity described in sub-regulation (1) shall additionally comply with the following regulations in Chapter V:

(a)  xxx

(b) xxx

(c) regulation 52(3), (4), (5) and (6);”

As evident above, Reg 52 (7) is not applicable to equity listed entities as it is required to comply with Reg, 32.

Disparity requiring clarification from SEBI 
1. Reporting of deviation in utilisation of proceeds in relation to debt securities/ NCRPS by equity listed entities

Reg. 52(7) is not applicable to companies that have listed i.e., specified securities as well as NCDs or NCRPs or both. Further, Reg, 32 only covers issuances relating to specified securities i.e. public issue, rights issue, preferential issue, QIP etc.

Pursuant to the aforesaid provisions, an equity listed entity is not required to submit details of deviation in utilisation of proceeds arising out of public issue or private placement of debt securities or NCRPS.

2. Requirement of NIL reporting

Reg 32 as well as Reg. 52(7) mandates reporting if there is any deviation. Requirement to submit a NIL report every quarter or half year respectively has not been expressly provided.

The format, on the contrary, provides as under:

Is there a Deviation / Variation in use of funds raised?                 Yes / No

While SEBI Circular does not provide any clear guidance on the said issue, ‘Guidance and FAQ on Regulation 32 of SEBI LODR, 2015 – Statement of deviation(s) or variation(s) issued by NSE states the following:

Since the Regulation only mentions about Statement of Deviation or Variation not about utilisation, is it mandatory for the Companies to give utilisation if there is no deviation or variation?

Reply: Companies need to give statement of utilisation as Regulation 32 (2) states that “The statement(s) specified in sub-regulation (1), shall be continued to be given till such time the issue proceeds have been fully utilised or the purpose for which these proceeds were raised has been achieved”. If companies do not give utilisation Exchange and Investors won’t know when the fund are fully utilised or the purpose for which these proceeds were raised has been achieved.”

3. Object of the issue

If disclosure under Reg. 32 as well as Reg. 52 gets triggered reporting only when there is a deviation or variation in the use of the proceeds from the objects mentioned in the offer document, it is important to clarify what events would amount to deviation.

One must understand that while the law uses the term objects of the issue, a company can raise funds for both general as well as specific purpose. For companies engaged in financing activities, the raising of funds is normally for general corporate purpose or working capital purpose unlike other classes of companies where the object for raising funds is specific.

Referring to the information memorandum of some of the NBFCs issuing debt securities, we find that the objects of the issue are generic in nature as follows:

  • Shriram Transport Finance Company Limited[5]

The Proceeds of the issue will be utilized for onlending to grow the asset book, financing of commercial vehicles.

  • Tata Capital Financial Services Limited[6]

For the purpose of onward lending, financing, and for repayment /prepayment of interest and principal of existing borrowings of TCFS.

General Corporate Purposes*

*The Net Proceeds will be first utilized towards the Objects mentioned above. The balance is proposed to be utilized for general corporate purposes, subject to such utilization not exceeding 25% of the amount raised in the Issue, in compliance with the SEBI Debt Regulations.

  • Fullerton India Credit Capital Limited[7]

The issuer shall use the proceeds from the issue  of the Debentures to finance business growth and general business purpose.

Further, some NBFCs and banking companies as mentioned below, have provided the following objects in their placement documents/ information memorandum:

  • L&T Finance Holdings Limited[8]

Subject to compliance with Applicable Laws and regulations, the Company intends to use the proceeds for redemption of preference shares, and funding the operations of the Company, including but not limited to, repayment of loans of the Company or to invest in its Subsidiaries in the form of Tier I and Tier II capital to enhance their capital adequacy.

  • HDFC Bank Limited[9]

Subject to compliance with applicable laws and regulations, we intend to use the Net Proceeds of the Issue, together with the proceeds of the ADR Offering and the Preferential Allotment, to strengthen our capital structure and ensuring adequate capital to support growth and expansion, including enhancing our solvency and capital adequacy ratio.

Whereas an infrastructure company like National Highways Authority of India Limited[10] provides a specific object in its offer document:

To part finance various projects being implemented by NHAI under the NHDP/Bharatmala Pariyojana and other national highway projects as approved by the Government of India.

When do we say amount is fully utilised?

In case of amounts raised for general purpose:

  • For NBFCs, the funds are raised to be deployed immediately either for refilling the working capital or direct investment or lending activities. Accordingly, one time intimation should suffice. The amount is said to be utilised for general purpose the moment the amount is transferred from separate bank account (opened under Section 42) to the regular bank account.
  • For other companies, where the funds are raised for a specific project or activity, then the reporting has to be made till the proceeds are fully utilised as per the specific object.

4. Review by the audit committee

The requirement of reporting under Reg. 32 is on a quarterly basis which means for the first three quarters, within 45 days from the end of the quarter and for the last quarter, within a period of 60 days from the end of the said last quarter.

However, the requirement of reporting under Reg. 52 is on a half yearly basis. The time period is 45 days from the half year end.

In both the cases, the audit committee has to review the said report and provide its comments, if any.

Disparity requiring clarification from SEBI

In view of aforesaid guidance from NSE, if ‘NIL’ reporting is mandatory, whether the ‘Nil’ report is also required to be placed before Audit Committee or the Board, as the case may be, and thereafter submitted to Stock Exchanges?

5. Timelines for submission under COVID situation

Normally, the companies are required to submit the certificate under Reg. 32 (2) within 45 days from the end of the quarter (for the first three quarters) and within 60 days from the end of the last quarter.  However, the time period allowed under Reg. 52 (7) is 45 days from the end of the half-year.

While SEBI has relaxed the timelines for submission of various returns/ intimations/ certificates and financial statements, however, the specific relaxation under Reg. 32 (2) as well as Reg. 52 (7) is still awaited.

In our view, considering the current situation, getting the comments of the audit committee within 45 days is not required in such cases and the same can be reviewed within the a period of 60 days or such extended time period as permitted by SEBI. Hence, there is no question for calling the meeting within such earlier time frame. Also, since this matter requires due discussion between the audit committee members, a circular resolution is surely not suggested.

6. Cases in which the monitoring agency has been appointed under ICDR

SEBI ICDR Regulations provide for appointment of a monitoring agency by the issuer in case the issue size exceeds INR 100 cr.

The monitoring agency is required to submit its report to the issuer in the specified format on a quarterly basis, till at least ninety five per cent. of the proceeds of the issue, excluding the proceeds raised for general corporate purposes, have been utilised.

Further, the format issued by SEBI under Reg. 32 also requires the issuer to mention about such monitoring agency along with its report/ comments.

Monitoring agencies have no relevance for bond issuances, therefore, the format under Reg. 52(7) does not require reporting on the same.


Pending clarification, in our view, a ‘NIL’ report may be filed by the companies. Further, as discussed above, SEBI should clarify on the applicability position for companies having both the specified securities and NCDs/ NCRPs or both listed.

Also, in view of the current pandemic surrounded situation, a clarification with respect to the timelines for reporting should also be given.

[1] SEBI Circular dated 24th December, 2019

[2] SEBI Circular dated 17th January, 2020

[3] Non Convertible Redeemable Preference Shares

[4] Non Convertible Redeemable Preference Shares







Majority of minority to ensure economic interest in transactions with related parties

SEBI’s proposal–came late, came correct

-CS Nitu Poddar, Tanvi Rastogi

Financial assistance to related entities is a quite a regular transaction. Considering the transfer of obligations, such transactions are subject to certain regulation under the Companies Act, 2013 (Act, 2013) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). However, despite the prohibitions and restrictions, there are several areas within the periphery of transactions with related parties which remain out of the ambit of law and therefore is beyond required checks. Following the proposal of changes in the provisions of RPT vide the report of the working group[1], SEBI has floated a consultative paper[2] on 06-03-2020 proposing certain changes to corporate guarantees being provided by a listed party on behalf of its promoter / promoter related entities, without deriving any economic benefit from such transaction.

In this article, we discuss the coverage of the current provisions, gap therein, need for the proposal and the proposed regime to bridge such gap.

Unrelated-related parties – remains unregulated

As compared to the Act, 2013, LODR has a wider definition of related party where it additionally covers related parties under AS-18 / IND AS-24 and also such member of promoter and promoter group which holds 20% of the total shareholding of the listed entity. Despite such wide definition, practically speaking, there may be several interested entities of the promoter which gets excluded from the technical criteria of being a related party due to absence of required shareholding and consequently transactions with them can easily sail through without being subject to required approvals. As such, currently, a listed entity can grant loan, give guarantee / security in connection of loan to / on behalf of an entity, which technically is not a related party, but either is a promoter or an entity in which the promoter has vested interest against the interest of stakeholders of the lending company.

Existing provisions regulating financial transactions

Currently, section 177, 185 and 186 of Act, 2013 are the major provisions governing any financial transactions. Section 188 of the Act, 2013, does not cover financial transaction within its coverage and therefore the same get ruled out anyway. Section 177 provides for scrutiny of inter-corporate loans as well as approval and modifications of all related party transactions. The challenge of this section are that firstly, transactions with interested unrelated party gets ruled out and   consequently the committee is left with the duty of a post mortem scrutiny and not a prior scanning of the transaction. Sec 186 provides for limits of financial transaction i.e giving of loan, investment, guarantee, security in connection with loan and also keeps a check on minimum rates to be charged in case of loan. Transactions beyond the limits require approval by special majority of the shareholders. Sec 185 talks about granting of loan to directors and director-interested entities. While there is complete prohibition of granting of such loan to the director himself or his relative / firm, loan can be granted to interested-companies, subject to approval by special majority of shareholders of the lender company.

To get such approval is not a tough task in a company with high promoter-holding, and the promoters can easily get their transaction through. Unlike sections 188 and 184 where the voting rights of the interested parties are restricted in the general meeting and board meeting respectively, section 185 and 186 does not provide for any such restrictions.

As per Reg 23 of LODR, related party transactions, which includes financial transactions as well, requires approval of shareholders by majority. This approval is by the majority of the minority as all entities falling under the definition of related parties cannot vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.

Proposed amendment – need and proposal 

It is to be noted that whenever there is a transaction with a promoter related entity, there may be a potential threat to the interest of the non-promoter group / minority shares. Accordingly, approval of the majority of such minority is to be essentially sought to ensure that the resources of the company are not been siphoned away / wrongly used / alienated by the promoters and that the interest of such minority is secured. As mentioned above, in the existing regime, question of approval from such majority of minority arise only for material RPTs under LODR.

Hence, all such transactions which does not fall under the category of “RPT” and / or “material” remains unguarded and thus putting the corporate governance of the company at stake.  SEBI, in its report on working group of RPT[3], has clearly put forward its intent to curb such influential transactions by the promoter / promoter group and to revise the definition of related party itself. Once the said proposal is made effective, all transactions with promoter / promoter group will be a RPT. However, inspite of such revision in the definition of RPT, only material transactions will require approval of minority shareholders.

Through the proposal in the consultative paper, SEBI intends to move a step ahead of what the working group discussed. SEBI now proposes to require all guarantee transactions, irrespective of the materiality to be approved by the majority of minority shareholders. Additionally, the directors of lending company are required to establish and record “economic interest” in granting of such guarantee.

Essence of voting by majority of minority

It is no approval, if the person seeking approval and granting approval is the same. In corporate democracy, approval is essentially ought to be sought from the class of people whose rights seem to be prejudiced from transaction proposed in the interest of another class. Reg 23 of LODR and sec 188 of Act, 2013 already recognises such majority of minority approval wherein all the related parties of the company refrain from voting.

Significance of “economic interest”

Any prudent mind would require risk and reward, benefit and burden to be shared proportionately. It is absolutely irrational to say that a listed company is extending guarantee / security in connection with loan but has no benefit in return.

It is to be noted that charging of guarantee commission or charging of interest is not to be misunderstood as presence of economic interest. There are charged only to keep the transaction at arm’s length. However, the exposure of the lender company is the amount of loan / amount guaranteed.

Few examples of embedded economic interest in a transaction can be as follows:

  1. A holding company extending loan to its wholly-owned subsidiary for funding acquisition of land for building of plant may be benefitted by the figures of such subsidiary at consolidated level;
  2. A listed company guaranteeing on behalf of another unrelated-related entity which is the customised raw material provider of the lending company

Different scenarios of financial transaction considering the proposal of SEBI:

S. No. Transaction between Existing provision Proposed amendment Analysis


Two unlisted companies Section 186 / 185, if  applicable Unlisted companies are not covered No Impact
2 Listed company with its related party – beyond materiality threshold Section 186 / 185, if  applicable and Reg 23- shareholders’ approval through resolution where no  related  party  shall  vote  to  approve Ensuring the economic interest + Prior  approval  from  the shareholders on a “majority of minority” basis Irrespective of the materiality, where there is any transfer of financial obligation, prior approval of unrelated shareholders will be required
3 Listed company with related party not within materiality threshold No requirement for shareholders’ approval Ensuring the economic interest + Prior  approval  from  the shareholders on a “majority of minority” basis Irrespective of the materiality, where there is any transfer of financial obligation, prior approval of unrelated shareholders will be required
4 Listed company with unrelated related party[4] No requirement prescribed under law

Open issues

  1. While the proposed amendment is absolutely on-point and timely amendment in the wake of several corporate scams in the recent past being witnessed by the country, however, it will achieve its intent if the same is not kept limited to guarantee / security in connection with loan, but also extended for granting of loan to such unrelated-related entities;
  2. Also, the list of entities is kept vague in the Paper (promoter(s)/ promoter group/ director / directors relative / KMP etc) and may be better clarified in the amendments, however, the intent seems to be quite clear to include any promoter / promoter group / management related entity;
  3. Lastly, it is not clear as to who should refrain from voting for majority of minority voting – all promoter / promoter group entities / all related parties of the listed entity;




[3] SEBI Report on working group of RPT dated 27th January, 2020 ibid

[4] Includes promoters which may not fall under definition of related party – like promoter not holding any shareholding in the company

Read our article on proposed changes by working group of SEBI on Related Party Transactions here:

Read our articles on the topic of related party transactions here: