Social Stock Exchanges – Enabling funding for social enterprises the regulated way

By Sharon Pinto & Sachin Sharma, Corplaw division, Vinod Kothari & Company  ( 


The inception of the idea of Social Stock Exchanges (SSEs) in India can be traced to the mention of the formation of an SSE under the regulatory purview of Securities and Exchange Board of India (SEBI) for listing and raising of capital by social enterprises and voluntary organisations, in the 2019-20 Budget Speech of the Finance Minister. Consequently, SEBI constituted a working group on SSEs under the Chairmanship of Shri Ishaat Hussain on September 19, 2019[1]. The report of the Working Group (WG) set forth the framework on SSEs, shed light on the concept of social enterprises as well as the nature of instruments that can be raised under such framework and uniform reporting procedures. For further deliberations and refining of the process, SEBI set up a Technical Group (TG) under the Chairmanship of Dr. Harsh Kumar Bhanwala (Ex-Chairman, NABARD) on September 21, 2020[2]. The report, made public on May 6, 2021[3], of the TG entails qualifying criteria as well as the exhaustive ecosystem in which such an SSE would function.

In this article we have analysed the framework set forth by the reports of the committees with the globally established practices.

Concept of SSEs

As per the report of the WG dated June 1, 2020[4], SSE is not only a place where securities or other funding structures are “listed” but also a set of procedures that act as a filter, selecting-in only those entities that are creating measurable social impact and reporting such impact. Further the SSE shall be a separate segment under the existing stock exchanges. Thus, an SSE provides the infrastructure for listing and disclosure of information of listed social enterprises.

Such a framework has been implemented in various countries and an analysis of the same can be set forth as follows:

A. United Kingdom

  • The Social Stock Exchange (SSX) was formed in June 2013 on the recommendation of the report of Social Investment Taskforce. The exchange does not yet facilitate share trading, but instead serves as a directory of companies that have passed a ‘social impact test’. It thus provides a detailed database of companies which have social businesses. It facilitates as a research service for potential social impact investors.
  • Further, companies that are trading publically in the main board stock exchange, may list their securities on SSX, thus only for-profit companies can list on the SSX[5] It works with the support of the London Stock Exchange and is a standalone body not regulated by any official entity.
  • Social and environment impact is the core aim of SSX. To satisfy the same, companies are required to submit a Social Impact Report for review by the independent Admissions Panel composed of 11 finance and impact investing experts.
  • The disclosure framework comprises adherence to UK Corporate Governance Guidelines and Filing Annual Social Impact Reports determine the continuation of listing in SSX.

B. Canada

  • Social Venture Connection (SVX)[6] was launched in 2013. Like SSX, SVX is not an actual trading platform but it is a private investment platform built to connect impact ventures, funds, and investors. It is open only for institutional investors[7].
  • The platform facilitates listing of for-profit business, NPO, or cooperatives categorized as, Social Impact Issuers and Environment Impact Issuers. These entities are required to be incorporated in Ontario for at least 2 years and have audited financial statements available.
  • For listing, a for-profit business must obtain satisfactory company ratings through GIIRS, a privately administered rating system.
  • Issuer must conform to the SVX Issuer Manual. In addition to this reporting of expenditure and other financial transactions shall be done once capital is raised. Further the issuers are required to file financial statements annually in accepted accounting methods and shall not have any misleading information. Ratings are required to be obtained, however the provisions are silent on the periodicity of revision of ratings.

C. Singapore

  • Singapore has established Impact Exchange (IX) which is operated by Stock Exchange of Mauritius and regulated by the Financial Service Commission of Mauritius.
  • IX is the only SSE that is an actual public exchange. It is thus a public trading platform dedicated to connecting social enterprise with mission-aligned investment. Social enterprises, both for-profits and non-profits, are permitted to list their project. NGOs are allowed as issuers of debt securities (such as bonds).
  • Listing requirements on the exchange are enumerated into social and financial categories. Following comprise the social criteria for listing:
  1. Specify social or economic impact as the reason for their primary existence.
  2. Articulate the purpose and intent of the company in the form of a theory of change- basis for demonstrating social performance.
  3. Commit to ongoing monitoring and evaluation of impact performance assessment and reporting.
  4. Minimum 1 year of impact reports prepared as per IX reporting principles.
  5. Certification of impact reports by an independent rating body 12 months prior listing.

Further the financial criteria entails the need for a fixed limit of minimum market capitalization, publication of financial statements and use of market-based approach for achieving its purpose.

D. South Africa

  • The ‘South Africa Social Exchange’ or SASIX[8], offers ethical investors a platform to buy shares in social projects according to two classifications: by sector and by province[9]. Guidelines for listing prescribe compliance with SASIX’s good practice norms for each sector.
  • In order to get listed, entities have to achieve a measurable social impact. The platform acts as a tool of research, evaluation and match-making to facilitate investments into social development projects
  • NGOs can also list their social projects on the exchange. Value of the projects is assessed and then divided into shares. Following project implementation, investors are given access to financial and social reports.
  • While social enterprises are required to have a social purpose as their primary aim, they are also expected to have a financially sustainable business model. The SASIX ceased functioning in 2017[10].

Key ingredients for a social enterprise

  • The report of the TG[11] has categorised social enterprises into For Profit Enterprise (FPEs) and Not for Profit Organisation (NPOs). In order to qualify as a social enterprise the entities shall establish primacy of social impact which shall be determined by application of the following 3 filters:

  • On establishment of the primacy of social impact through the three filters as stated above, the entity shall be eligible to qualify for on-boarding the SSE and access to the SSE for fund-raising upon submitting a declaration as prescribed.

Qualifying criteria and process for onboarding

As per TG recommendation, an NPO is required to register on any of the Social Stock Exchange and thereafter, it may choose to list or not. However, an FPE can proceed directly for listing, provided it is a company registered under Companies Act and complies with the requirements in terms of SEBI Regulations for issuance and listing of equity or debt securities.

Further, the TG has recommended a set of mandatory criteria as mentioned below that NPOs shall meet in order to register.

A. Legal Requirements:

  • Entity is legally registered as an NPO (Charitable Trust/ Society/Section-8 Co’s).
  • Shall have governing documents (MoA & AoA/ Trust Deed/ Bye-laws/ Constitution) & Disclose whether owned and/or controlled by government or private.
  • Shall have Registration Certificate under 12A/12AA/12AB under Income Tax.
  • Shall have a valid IT PAN.
  • Shall have a Registration Certificate of minimum 3 years of its existence.
  • Shall have valid 80G registration under Income-Tax.

B. Minimum Fund Flows:

In order to ensure that the NPO wishing to register has an adequate track-record of operations.

  • Receipts or payments from Audited accounts/ Fund Flow Statement in the last financial year must be at least Rs. 50 lakhs.
  • Receipts from Audited accounts/ Fund Flow Statement in the last financial year must be at least Rs. 10 lakhs.

Framework for listing

Post establishment of the eligibility for listing and the additional registration criteria in case of NPOs, the social enterprises may list their securities in the manner discussed further. The listing procedures vary for NPOs and FPEs and is set forth as follows:


  • NPO shall be required to provide audited financial statements for the previous 3 years and social impact statements in the format prescribed. Further the offer document shall comprise of ‘differentiators’ which shall help the potential investors to assess the NPOs being listed and form a sound and well-informed investment decision. A list of 11 such differentiators has been provided in the report of the TG.
  • Further in case of program-specific or project-specific listings, the NPO shall have to provide a greater level of detail in the listing document about its track record and impact created in the program target segment.
  • All the information submitted as part of pre-listing and post-listing requirements, shall be duly displayed on the website of the NPO.


  • In case of an FPE, existing regulatory guidelines under various SEBI Regulations for listing securities such as equity, debt shall be complied with.
  • The differentiators will be in addition to requirements as mandated in SEBI Regulations in respect of raising funds through equity or debt.
  • Further, FPEs have been granted an option to list their securities on the appropriate existing boards. Thus the issuer may at their discretion list their debt securities on the main boards, while equity securities may be listed on the main boards, or on the SME or IGP.

Types of instruments 

Depending on the type of organisation, SSEs shall allow a variety of financing instruments for NPOs and FPEs. As FPEs have already well-established instruments, these securities are permitted to be listed on the Main Board/IGP/SME, however visibility shall be given to such entities by identifying them as For Profit Social Enterprise (FPSE) on the respective stock exchanges.

Modes available for fundraising for NPOs shall be Equity (Section 8 Co’s.), Zero Coupon Zero Principal (ZCZP) bonds [this will have to be notified as a security under Securities Contracts (Regulation) Act, 1956 (SCRA)], Development Impact Bonds (DIB), Social Impact Fund (SIF) (currently known as Social Venture Fund) with 100% grants-in grants out provision and funding by investors through Mutual Funds. On the other hand, FPEs shall be able to raise funds through equity, debt, DIBs and SIFs.

While SVF is an existing model for fund-raising, the TG has proposed various changes in order to incentivise investors and philanthropists to invest in such instruments. In addition to change in nomenclature from SVF to SIF, minimum corpus size is proposed to be reduced from Rs. 20 Cr to Rs. 5 Cr. Further, minimum subscription shall stand at Rs. 2L from the current Rs. 1 Cr. The amendments shall also allow corporates to invest CSR funds into SVFs with a 100% grants-in, grants out model.

Disclosure and Reporting norms

Once the FPE or the NPO (registered/listed) has been demarcated by the exchange to be an SE, it needs to comply with a set of minimum disclosure and reporting requirements to continue to remain listed/registered. The disclosure requirements can be enlisted as follows:

For NPO:

  • NPO’s (either registered or listed) will have to disclose on general, governance and financial aspects on an annual basis.
  • The disclosures will include vision, mission, activities, scale of operations, board and management, related party transactions, remuneration policies, stakeholder redressal, balance sheet, income statement, program-wise fund utilization for the year, auditors report etc.
  • NPO’s will have to report within 7 days any event that might have a material impact on the planned achievement of their outputs or outcomes, to the exchange in which they are registered/listed. This disclosure will include details of the event, the potential impact and what the NPO is doing to overcome the impact.
  • NPO”s that have listed its securities will have to disclose Social Impact Report covering aspects such as strategic intent and planning, approach, impact score card etc. on annual basis.

For FPE:

FPE’s having listed equity/debt will have to disclose Social Impact Report on annual basis and comply with the disclosure requirements as per the applicable segment such as main board, SME, IGP etc.

Other factors of the SSE ecosystem

a. Capacity Building Fund

As per the recommendation of the WG, constitution of a Capacity Building Fund (CBF) has been proposed. The said fund shall be housed under NABARD and funded by Stock Exchanges, other developmental agencies such as SIDBI, other financial institutions, and donors (CSRs). The fund shall have a corpus of Rs. 100 Cr and shall be an entity registered under 80G, which shall make it eligible for receiving CSR donations pursuant to changes to Section 135/Schedule VII of Companies Act 2013. The role of the fund shall encompass facilitating NPOs for registration and listing procedures as well as proper reporting framework. These functions shall be carried out in the form awareness programs.

b. Social Auditors

Social audit of the enterprises shall compose of two components – financial audit and non-financial audit, which shall be carried out by financial or non-financial auditors. In addition to holding a certificate of practice from the Institute of Chartered Accountants of India (ICAI), the auditors will be required to have attended a course at the National Institute of Securities Markets (NISM) and received a certificate of completion after successfully passing the course examination. The SRO shall prepare the criteria and list of firms/institutions for the first phase soon after the formation of SSEs, and those firms/institutions shall register with the SRO.

c. Information Repositories

The platform shall function as a research tool for the various social enterprises to be listed, thus Information Repository (IR) forms an important component of the framework. It functions as an aggregator of information on NGOs, and provides a searchable electronic database in a comparable form. Thus it shall provide accurate, timely, reliable information required by the potential investors to make well informed decisions.


The social sector in India is getting increasingly powerful – this was evident during Covid-crisis based on the wonderful work done by several NGOs. Of course, all social work requires funding, and being able to crowd source funding in a legitimate and transparent manner is quintessential for the social sector. We find the report of the TG to be raising and addressing relevant issues. We are hoping that SEBI will now find it easy to come out with the needed regulatory platform to allow social enterprises to get funding through SSEs.

Our other article on the similar topic can be read here –













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 –


Law relating to collective investment schemes on shared ownership of real assets

-Vinod Kothari (

The law relating to collective investment schemes has always been, and perhaps will remain, enigmatic, because these provisions were designed to ensure that enthusiastic operators do not source investors’ money with tall promises of profits or returns, and start running what is loosely referred to as Ponzi schemes of various shades. De facto collective investment schemes or schemes for raising money from investors may be run in elusive forms as well – as multi-level marketing schemes, schemes for shared ownership of property or resources, or in form of cancellable contracts for purchase of goods or services on a future date.

While regulations will always need to chase clever financial fraudsters, who are always a day ahead of the regulator, this article is focused on schemes of shared ownership of properties. Shared economy is the cult of the day; from houses to cars to other indivisible resources, the internet economy is making it possible for users to focus on experience and use rather than ownership and pride of possession. Our colleagues have written on the schemes for shared property ownership[1]. Our colleagues have also written about the law of collective investment schemes in relation to real estate financing[2]. Also, this author, along with a colleague, has written how the confusion among regulators continues to put investors in such schemes to prejudice and allows operators to make a fast buck[3].

This article focuses on the shared property devices and the sweep of the law relating to collective investment schemes in relation thereto.

Basis of the law relating to collective investment schemes

The legislative basis for collective investment scheme regulations is sec. 11AA (2) of the SEBI Act. The said section provides:

Any scheme or arrangement made or offered by any company under which,

  • the contributions, or payments made by the investors, by whatever name called, are pooled and utilized solely for the purposes of the scheme or arrangement;
  • the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement;
  • the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;
  • the investors do not have day to day control over the management and operation of the scheme or arrangement.

The major features of a CIS may be visible from the definition. These are:

  1. A schematic for the operator to collect investors’ money: There must be a scheme or an arrangement. A scheme implies a well-structured arrangement whereby money is collected under the scheme. Usually, every such scheme provides for the entry as well as exit, and the scheme typically offers some rate of return or profit. Whether the profit is guaranteed or not, does not matter, at least looking at the definition. Since there is a scheme, there must be some operator of the scheme, and there must be some persons who put in their money into the scheme. These are called “investors”.
  2. Pooling of contributions: The next important part of a CIS is the pooling of contributions. Pooling implies the contributions losing their individuality and becoming part of a single fungible hotchpot. If each investor’s money, and the investments therefrom, are identifiable and severable, there is no pooling. The whole stance of CIS is collective investment. If the investment is severable, then the scheme is no more a collective scheme.
  3. Intent of receiving profits, produce, income or property: The intent of the investors contributing money is to receive results of the collective investment. The results may be in form of profits, produce, income or property. The usual feature of CIS is the operator tempting investors with guaranteed rate of return; however, that is not an essential feature of CISs.
  4. Separation of management and investment: The management of the money is in the hands of a person, say, investment manager. If the investors manage their own investments, there is no question of a CIS. Typically, investor is someone who becomes a passive investor and does not have first level control (see next bullet). It does not matter whether the so-called manager is an investor himself, or may be the operator of the scheme as well. However, the essential feature is there being multiple “investors”, and one or some “manager”.
  5. Investors not having regular control over the investments: As discussed above, the hiving off of the ownership and management of funds is the very genesis of the regulatory concern in a CIS, and therefore, that is a key feature.

The definition may be compared with section 235 of the UK Financial Services and Markets Act, which provides as follows:

  • In this Part “collective investment scheme” means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
  • The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
  • The arrangements must also have either or both of the following characteristics—
  • the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
  • the property is managed as a whole by or on behalf of the operator of the scheme.
    • If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.

It is conspicuous that all the features of the definition in the Indian law are present in the UK law as well.

Hong Kong Securities and Futures Ordinance [Schedule 1] defines a collective investment scheme as follows:

collective investment scheme means—

  • arrangements in respect of any property—
  • under which the participating persons do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management;
  • under which—
  • the property is managed as a whole by or on behalf of the person operating the arrangements;
  • the contributions of the participating persons and the profits or income from which payments are made to them are pooled; or
  • the property is managed as a whole by or on behalf of the person operating the arrangements, and the contributions of the participating persons and the profits or income from which payments are made to them are pooled; and
  • the purpose or effect, or pretended purpose or effect, of which is to enable the participating persons, whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise, to participate in or receive—
  • profits, income or other returns represented to arise or to be likely to arise from the acquisition, holding, management or disposal of the property or any part of the property, or sums represented to be paid or to be likely to be paid out of any such profits, income or other returns; or
  • a payment or other returns arising from the acquisition, holding or disposal of, the exercise of any right in, the redemption of, or the expiry of, any right, interest, title or benefit in the property or any part of the property; or
  • arrangements which are arrangements, or are of a class or description of arrangements, prescribed by notice under section 393 of this Ordinance as being regarded as collective investment schemes in accordance with the terms of the notice.

One may notice that this definition as well has substantially the same features as the definition in the UK law.

Judicial analysis of the definition

Part (iii) of the definition in Indian law refers to management of the contribution, property or investment on behalf of the investors, and part (iv) lays down that the investors do not have day to day control over the operation or management. The same features, in UK law, are stated in sec. 235 (2) and (3), emphasizing on the management of the contributions as a whole, on behalf of the investors, and investors not doing individual management of their own money or property. The question has been discussed in multiple UK rulings. In Financial Conduct Authority vs Capital Alternatives and others,  [2015] EWCA Civ 284, [2015] 2 BCLC 502[4], UK Court of Appeal, on the issue whether any extent of individual management by investors will take the scheme of the definition of CIS, held as follows:  “The phrase “the property is managed as a whole” uses words of ordinary language. I do not regard it as appropriate to attach to the words some form of exclusionary test based on whether the elements of individual management were “substantial” – an adjective of some elasticity. The critical question is whether a characteristic feature of the arrangements under the scheme is that the property to which those arrangements relate is managed as a whole. Whether that condition is satisfied requires an overall assessment and evaluation of the relevant facts. For that purpose it is necessary to identify (i) what is “the property”, and (ii) what is the management thereof which is directed towards achieving the contemplated income or profit. It is not necessary that there should be no individual management activity – only that the nature of the scheme is that, in essence, the property is managed as a whole, to which question the amount of individual management of the property will plainly be relevant”.

UK Supreme Court considered a common collective land-related venture, viz., land bank structure, in Asset Land Investment Plc vs Financial Conduct Authority, [2016] UKSC 17[5]. Once again, on the issue of whether the property is collective managed, or managed by respective investors, the following paras from UK Financial Conduct Authority were cited with approval:

The purpose of the ‘day-to-day control’ test is to try to draw an important distinction about the nature of the investment that each investor is making. If the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property, the arrangements would be regarded as a collective investment scheme.

Day-to-day control is not defined and so must be given its ordinary meaning. In our view, this means you have the power, from day-to-day, to decide how the property is managed. You can delegate actual management so long as you still have day-to-day control over it.[6]

The distancing of control over a real asset, even though owned by the investor, may put him in the position of a financial investor. This is a classic test used by US courts, in a test called Howey Test, coming from a 1946 ruling in SEC vs. Howey[7]. If an investment opportunity is open to many people, and if investors have little to no control or management of investment money or assets, then that investment is probably a security. If, on the other hand, an investment is made available only to a few close friends or associates, and if these investors have significant influence over how the investment is managed, then it is probably not a security.

The financial world and the real world

As is apparent, the definition in sec. 235 of the UK legislation has inspired the draft of the Indian law. It is intriguing to seek as to how the collective ownership or management of real properties has come within the sweep of the law. Evidently, CIS regulation is a part of regulation of financial services, whereas collective ownership or management of real assets is a part of the real world. There are myriad situations in real life where collective business pursuits,  or collective ownership or management of properties is done. A condominium is one of the commonest examples of shared residential space and services. People join together to own land, or build houses. In the good old traditional world, one would have expected people to come together based on some sort of “relationship” – families, friends, communities, joint venturers, or so on. In the interweb world, these relationships may be between people who are invisibly connected by technology. So the issue, why would a collective ownership or management of real assets be regarded as a financial instrument, to attract what is admittedly a  piece of financial law.

The origins of this lie in a 1984 Report[8] and a 1985 White Paper[9], by Prof LCB Gower, which eventually led to the enactment of the 1986 UK Financial Markets law. Gower has discussed the background as to why contracts for real assets may, in certain circumstances, be regarded as financial contracts. According to Gower, all forms of investment should be regulated “other than those in physical objects over which the investor will have exclusive control. That is to say, if there was investment in physical objects over which the investor had no exclusive control, it would be in the nature of an investment, and hence, ought to be regulated. However, the basis of regulating investment in real assets is the resemblance the same has with a financial instrument, as noted by UK Supreme Court in the Asset Land ruling: “..the draftsman resolved to deal with the regulation of collective investment schemes comprising physical assets as part of the broader system of statutory regulation governing unit trusts and open-ended investment companies, which they largely resembled.”

The wide sweep of the regulatory definition is obviously intended so as not to leave gaps open for hucksters to make the most. However, as the UK Supreme Court in Asset Land remarked: “The consequences of operating a collective investment scheme without authority are sufficiently grave to warrant a cautious approach to the construction of the extraordinarily vague concepts deployed in section 235.”

The intent of CIS regulation is to capture such real property ownership devices which are the functional equivalents of alternative investment funds or mutual funds. In essence, the scheme should be operating as a pooling of money, rather than pooling of physical assets. The following remarks in UK Asset Land ruling aptly capture the intent of CIS regulation: “The fundamental distinction which underlies the whole of section 235 is between (i) cases where the investor retains entire control of the property and simply employs the services of an investment professional (who may or may not be the person from whom he acquired it) to enhance value; and (ii) cases where he and other investors surrender control over their property to the operator of a scheme so that it can be either pooled or managed in common, in return for a share of the profits generated by the collective fund.”


While the intent and purport of CIS regulation world over is quite clear, but the provisions  have been described as “extraordinarily vague”. In the shared economy, there are numerous examples of ownership of property being given up for the right of enjoyment. As long as the intent is to enjoy the usufructs of a real property, there is evidently a pooling of resources, but the pooling is not to generate financial returns, but real returns. If the intent is not to create a functional equivalent of an investment fund, normally lure of a financial rate of return, the transaction should not be construed as a collective investment scheme.


[1] Vishes Kothari: Property Share Business Models in India,

[2] Nidhi Jain, Collective Investment Schemes for Real Estate Investments in India, at

[3] Vinod Kothari and Nidhi Jain article at:




[7] 328 U.S. 293 (1946), at

[8] Review of Investor Protection, Part I, Cmnd 9215 (1984)

[9] Financial Services in the United Kingdom: A New Framework for Investor Protection (Cmnd 9432) 1985


Our Other Related Articles

Property Share Business Models in India,<>

Collective Investments Schemes: How gullible investors continue to lose money <>

Collective Investment Schemes for Real Estate Investments in India, <>


SEBI revisits mode of bidding in public issue of debt securities

Permits submission through UPI mechanism and online interface

-CS Henil Shah & CS Burhanuddin Dohadwala


In order to streamline the process in case of public issue of debt securities and to add an addition to the current Application Supported by Blocked Amount (‘ASBA’) facility. Securities and Exchange Board of India (‘SEBI’) vide its circular dated November 23, 2020[1] (‘November 23 Circular’) has introduction Unified Payments Interface (‘UPI’) mechanism for the process of public issues of securities under:

  • SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’);
  • SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘NCRPS Regulations’);
  • SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (‘SDI Regulations’) and
  • SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (‘ILDM Regulations’).

The said circular shall be effective to a public issue of securities for the aforesaid captioned regulations which opens on or after January 01, 2021 (‘effective date’).  Earlier, SEBI Circular dated July 27, 2012[2] (‘Erstwhile Circular’) provided the system for making application to public issue of debt securities.  The Erstwhile Circular will stand repealed from the effective date. However, SEBI Circular dated October 29, 2013[3] w.r.t allotment of debt securities shall continue to remain in force.

Earlier in November, 2018[4] SEBI had introduced use of UPI as a payment mechanism with ASBA, to streamline the process of public issue of equity shares and convertibles and implemented the same in 3 phases.

The article below covers the role required to be done by the issuer in case of public issue of debt securities.


UPI[5] is an instant payment system developed by the National Payments Corporation of India (‘NPCI’), an RBI regulated entity. UPI is built over the IMPS (‘Immediate Payment Service’) infrastructure and allows you to instantly transfer money between any two parties’ bank accounts.

The facility to block funds through UPI mechanism whether applying through intermediaries (viz syndicate members, registered stock brokers, register and transfer agent and depository participants) or directly via Stock Exchange (‘SE’) app/ interface is set for upto and amount of Rs. 2 lakhs, which is the maximum limit approved by NPCI for capital markets vide its circular dated March 03, 2020[6].

Appointment of Sponsor Bank

Sponsor Bank as a term was introduced under the SEBI circular dated November 01, 2018 meaning a self-certified syndicate bank appointed by issuer to conduit/act as a channel with SE and NCPI to facilitate mandate collect requests and/or payment instructions of retail investors.

Comparison of mode of application under November 23 Circular and Erstwhile Circular

November 23 Circular Erstwhile Circular Remarks
Direct application through SE app/web-interface along with amount blocked via UPI mechanism. Direct application over the SE interface with online payment facility; Online payment facility stands replaced with UPI mechanism. However, it is not clear as to how the application to be submitted where amount to be invested is above 2 lac rupees.
Application through intermediaries along with details of his/her bank accounts for blocking funds Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE using ASBA facility No change
Application through SCSBs with ASBA. Applications through banks using ASBA facility; No change
Application through SCSBs/intermediaries along with his/her bank account linked UPI ID for the purpose of blocking of funds, if the application value is Rs.2 lac or less.

New insertion.

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE without use of ASBA facility This was discontinued for all public issue of debt securities made on or after October 01, 2018 vide SEBI Circular dated August 16, 2018[7].

Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE for applicants who intended to hold debt securities in physical form. No reference made in the present circular

Modes of submitting application as per November 23 Circular

Process of the applying utilizing UPI mechanism is produced in a diagrammatic form as below:

* Application made on SE App/web interface shall automatically get updated on SE biding platform

# Upon bid being entered under the bidding platform SE shall undertake validation process of PAN and Demat account along with Depository.

## In case of any discrepancies the same are reported by depositories to SE which in turn relays the same to intermediaries for corrections.

Roles of issuer in case of public issue of debt securities

Apart from appointing a sponsor bank by the issuer the roles of issuer remain same as those already required under the SEBI circular dated July 27, 2012 i.e.:

  • Use of SE platform;
  • Entering to agreement with SE with respect to use of same;
  • Dispute resolution mechanism between the issuer and SE and maintenance of escrow account remain the same.

Only the aforesaid roles are aligned with newly introduced with UPI Mechanism.

Allotment of securities within 6 days

SEBI vide its circular dated November 10, 2015 had, in order to stream line the process of public issue of equity shares and convertibles issued a circular to reduce the timeline for issue from 12 working days to 6 working days and same was introduced for public issue of debt securities, NCRPS and SDI vide circular dated August 16, 2018[8]. The same has been re-iterated/repeated under the November 23 Circular. Indicative timelines for various activities are re-produced under Annexure-A.

Additional data details required to be mentioned under the Application and biding form relating to UPI

  1. Under Main Application form
  • Payment details –UPI ID with maximum length of 45 characters
  • Acknowledgement slip for SCSB/broker/RTA/DP
    • Payment details to include UPI
  • Acknowledgement slip for bidder
    • Payment details to include UPI ID
  1. Overleaf of Main Application form
  • UPI Mechanism for Blocking Fund would be available for Application value upto Rs. 2 Lakhs;
  • Bidder’s Undertaking and confirmation to include blocking of funds through UPI mode;
  • Instructions with respect to payment / payment instrument to include instructions for blocking of funds through UPI mode.


Public issue application using UPI is a step towards digitizing the offline processes involved in the application process by moving the same online. UPI mechanism in public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.

Annexure A:

Indicative timelines for various activities

Sr. No. Particulars Due Date (working day)
1. Issue Closes T (Issue closing date)
  • SE(s) shall allow modification of selected fields (till 01:00 PM) in the bid details already uploaded.
  • Registrar to get the electronic bid details from the SE by end of the day.
  • SCSBs to continue / begin blocking of funds.
  • Designated    branches    of    SCSBs    may   not    accept    schedule    and applications after T+1 day.
  • Registrar to give bid file received from SE containing the application number and amount to all the SCSBs who may use this file for validation/ reconciliation at their end.
  • Issuer, merchant banker and registrar to submit relevant documents to  the  SE(s)  except  listing  application,  allotment  details and   demat   credit   and   refund   details   for   the   purpose   of   listing permission.
  • SCSBs to send confirmation of funds blocked (Final Certificate) to the registrar by end of the day.
  • Registrar shall reconcile the compiled data received from the SE(s) and all SCSBs (hereinafter referred to as the “reconciled data”).
  • Registrar to undertake “Technical Rejection” test based on electronic bid details and prepare list of technical rejection cases.
  • Finalization of technical rejection and minutes of the meeting between issuer, lead manager, registrar.
  • Registrar  shall  finalise  the  basis  of  allotment  and  submit  it  to  the designated SE for approval.
  • Designated SE to approve the basis of allotment.
  • Registrar to prepare funds transfer schedule based on approved basis of allotment.
  • Registrar and merchant banker to issue funds transfer instructions to SCSBs.
  • SCSBs  to  credit  the  funds  in  public  issue  account  of  the  issuer  and confirm the same.
  • Issuer shall make the allotment.
  • Registrar/Issuer   to   initiate   corporate   action   for credit   of   debt securities, NCRPS, SDI to successful allottees.
  • Issuer  and  registrar  to  file  allotment  details  with  designated  stock exchange(s)  and  confirm  all  formalities  are  complete  except  demat credit.
  • Registrar  to  send  bank-wise  data  of  allottees, amount  due  on  debt securities,  NCRPS,  SDI allotted,  if  any,  and  balance  amount  to  be unblocked to SCSBs.
  • Registrar to receive confirmation of demat credit from depositories.
  • Issuer and registrar to file confirmation of demat credit and issuance of instructions to unblock  ASBA  funds,  as  applicable,  with  SE(s).
  • The   lead   manager(s)   shall   ensure   that   the   allotment,   credit   of dematerialised debt securities, NCRPS, SDI and refund or unblocking of application monies, as may be applicable, are done electronically.
  • Issuer  to  make  a  listing  application  to  SE(s)  and  SE(s) to give listing and trading permission.
  • SE(s) to issue commencement of trading notice.
7. Trading commences; T+6

Our other materials on the topic can be read here –









2020 – Year of changes for AIFs

Timothy Lopes – Senior Executive                                                                             CS Harshil Matalia – Assistant Manager

The year 2020 – ‘Year of pandemic’, rather we can say the year of astonishing events for everyone over the globe. Without any doubt, this year has also been a roller coaster ride for Alternative Investment Funds (‘AIFs’) with several changes in the regulatory framework governing AIFs in India.

Recent Regulatory Changes for AIFs

In continuation to the stream of changes, Securities Exchange Board of India (‘SEBI’), in its board meeting dated September 29, 2020, has approved certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). The said amendments have been notified by the SEBI vide notification dated October 19, 2020. The following article throws some light on SEBI (AIFs) Amendment Regulations, 2020 (‘Amendment Regulations’) and tries to analyse its impact on AIFs.

Clarification on Eligibility Criteria

Regulation 4 of AIF Regulations prescribes eligibility criteria for obtaining registration as AIF with SEBI. Prior to the amendment,  Regulation 4(g), provided as follows:

“4 (g) the key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;”

The amended provision to 4 (g) extends the meaning of relevant professional qualification, the effect of which seems to add more qualitative criteria to the management team of the AIF, to be evaluated  at the time of grant of certification. The newly amended section 4(g) of the AIF Regulations reads as follow:

“(g) The key investment team of the Manager of Alternative Investment Fund has –

  • adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets; and
  • at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board:

Provided that the requirements of experience and professional qualification as specified in regulation 4(g)(i) and 4(g)(ii) may also be fulfilled by the same key personnel.”

It is apparent from the prima facie comparison of language that the key investment team of the Manager may have one key person with five years of experience (quantitative) as well as a personnel holding professional qualification (qualitative) from institutions recognised under the regulation. Further, clarity has been appended in form of proviso to the section that quantitative and qualitative requirements could be met by either one person, or it could be achieved collectively by more than one person in the fund.

With this elaboration, SEBI has harmonized the qualification requirements as that with the requirement specified for other intermediaries such as Investment Advisers, Research Analysts etc. in their respective regulations. Detailed prescription on degrees and qualifications for AIF registration by SEBI is a conferring move and is expected to aid as a clear pre-requisite on expectations of SEBI from prospective applications for registration of the fund.

Formation of Investment Committee

Regulation 20 of AIF Regulations specifies general obligations of AIFs. Erstwhile, the responsibility of making investment decisions was upon the manager of AIFs. It has been noticed by the SEBI from the disclosures made in draft Private Placement Memorandums (‘PPMs’) filed by AIFs for launch of new schemes, that generally Managers prefer to constitute an Investment Committee to be involved in the process of taking investment decisions for the AIF. However, there was no corresponding obligation in the AIF Regulations explicitly recognizing the ‘Investment Committee’ to take investment decisions for AIFs. Such Investment Committees may comprise of internal or external members such as employees/directors/partners of the Manager, nominees of the Sponsor, employees of Group Companies of the Sponsor/ Manager, domain experts, investors or their nominees etc.

These  amendments are based on the recommendations to SEBI to recognize the practice followed by AIFs to delegate decision making to the Investment Committee.[1] The rationale behind amendments to AIF Regulations is based on the following merits as proposed in the recommendations::

  1. Presence of investors or Sponsors or their nominees in an Investment Committee which may serve to improve the due diligence carried out by the Manager, as they are stakeholders in the AIF’s investments.
  2. Presence of functional resources from affiliate/group companies of the Manager (legal advisor, compliance advisor, financial advisor etc.) in the Investment Committee may be useful to ensure compliance with all applicable laws.
  3. Presence of domain experts in the committee may provide comfort to the investors regarding suitability of the investment decisions, as the investment team of the Manager may not have domain expertise in all industries/ sectors where the fund proposes to invest.

Thus, the insertion was made, giving the option to the Manager to constitute an investment committee subject to the following conditions laid down in the newly inserted sub-regulation, i.e. Regulation 20(6) of the AIF Regulations given below –

  1. The members of the Investment Committee shall be equally responsible as the Manager for investment decisions of the AIF.
  2. The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the AIF comply with the provisions of AIF Regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.
  3. External members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of on-boarding investors shall be appointed to the Investment Committee only with the consent of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund or scheme.
  4. Any other conditions as specified by the SEBI from time to time.

The constitution of investment committee is a global standard practice followed by the Funds. However, funds structure in India might be altered with the new defining role of investment committee under the AIF Regulations. The investment committee generally comprises of nominees of large investors in the fund and at times other external independent professional bodies that act as a consenting body towards prospective deals of the fund. The amendment will alter the role of investors holding positions at investment committee as the new defining role might deter them from taking underlying obligations. From the funds perspective seeking external independent professionals might get costly as there is an obligation introduced by way of this amendment regulation. Further, it casts an onus on the investment committee to be involved in day to day functioning of the fund, which used to be otherwise (where members were usually involved in mere finalising the deals).  Lateral entry of the members to investment committee post placement of memorandum with the consent of investors is aimed at greater transparency in funds functioning.

Test for indirect foreign investment by an AIF

As per Clause 4 of Schedule VIII of FEMA (Non-Debt Instrument) Rules, 2019 (‘NDI Rules’) any investment made by an Investment Vehicle into an Indian entity shall be reckoned as indirect foreign investment for the investee Indian entity if the Sponsor or the Manager or the Investment Manager –

(i) is not owned and not controlled by resident Indian citizens or;

(ii) is owned or controlled by persons resident outside India.

Therefore, in order to determine whether the investment made by AIFs in Indian entity is indirect foreign investment, it is essential to identify the nature of the Manager/Sponsor/investment manager, whether he is owned or controlled by a resident Indian citizen or person resident outside India.

RBI in its reply to SEBI’s query on downstream investment had clarified that since investment decisions of an AIF are taken by its Manager or Sponsor, the downstream investment guidelines for AIFs were focused on ownership and control of Manager or Sponsor. Thus, if the Manager or Sponsor is owned or controlled by a non-resident Indian citizen or by person resident outside India then investment made by such AIF shall be considered as indirect foreign investment.

Whether an investment decision made by the Investment Committee of AIF consisting of external members who are not Indian resident citizens would amount to indirect foreign investment?

In light of the above provisions of the NDI Rules and with the introduction of the concept of an “Investment Committee”, SEBI has sought clarification from the Government and RBI vide its letter dated September 07, 2020[2].


With the enhancement in eligibility criteria, SEBI has ensured that the investment management team of the AIF would have relevant expertise and required skill sets.

Further, giving recognition to the concept of an investment committee will cast an obligation on investment committee fiduciary like obligations towards all the investors in the fund. . However, there exists certain ambiguity under the NDI Rules, for applications wherein external members of investment committee who are not ‘resident Indian citizens’,   which is currently on hold and pending receipt of clarification.



Summary of the cartload of amendments introduced towards DTs and corporate bonds

SEBI implements measures proposed in the Consultation Paper on Corporate Bonds and Debenture Trustees

-Aanchal Kaur Nagpal, Executive & Burhanuddin Dohadwala, Manager


Owing to a wide array of defaults by various companies owning debt obligations SEBI, in order to secure the interest of the debenture holders, introduced various measures, particularly in respect of Debenture Trustees (‘DTs’), as they are the ultimate saviors of the debenture holders.

An effective mechanism in place for DTs would ultimately lead to better protection of the interests of the debenture holders increasing investor confidence.

SEBI had issued a consultation paper dated February 25, 2020 (‘Consultation Paper’)[1] to seek comments/ views on the measures that were expected to strengthen the regulatory framework for corporate bonds, secure the interest of the debenture holders, enhance the role of the DTs and empower them to effectively discharge their responsibilities towards the debenture holders of listed debt issues/ proposed to be listed debt issues.

The increased events of default by a few financial institutions and the lapses/ complications on the part of DTs in the expeditious enforcement of the security brought to the fore, the need for a review of the present regulatory framework for DT.

With the given challenges/hurdles observed in:

  • Charge creation;
  • Enforcement of security of the secured debentures;
  • Delay in enforcing the security in the event of default;
  • Inter Creditor Agreement (‘ICA’);
  • Creation of floating charges and
  • Other related issues in the recent cases of default,

SEBI intended to review the regulatory framework for DTs and put in place various provisions that would further secure the interests of the debenture holders of listed debt issues, enable the DTs to perform their duties in the interest of the investors more effectively and promptly in case of default.

Implementation of the proposed changes in the Consultation Paper:

SEBI implemented the amendments/changes as discussed in the consultation paper by way of the following:

  1. SEBI (Debenture Trustees) (Amendment) Regulations, 2020[2] dated 8th October, 2020 (‘DT Amendment Regulations’);
  2. SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2020[3] dated 8th October, 2020 (‘ILDS Amendment Regulations’);
  3. SEBI (LODR) (Third Amendment) Regulations, 2020[4] dated 8th October, 2020 (‘LODR Regulations’);
  4. Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities dated 13th October, 2020[5]; (‘SOP for DTs’)
  5. Contribution by Issuers of listed or proposed to be listed debt securities towards creation of Recovery Expense Fund dated 22nd October, 2020[6] , effective from January 01, 2021; (‘Circular on recovery fund’)
  6. Creation of Security in issuance of listed debt securities and ‘due diligence’ by debenture trustee; (Dated November 03, 2020[7]), effective for new issues proposed to be listed on or after January 01, 2021, (‘Circular on creation of security’).

Thus, all the above provisions are to be read together with the Consultation Paper.  We have tried to provide a holistic view of the proposals in the Consultation Paper as well the implementation of the same through the table below:

Sr. No. Point of consideration Recommendation by the Consultation Paper Implementation Status Our remarks/comments
Creation of Identified Charge
1) NBFCs create a floating charge on their entire receivables for all its lenders on a pari passu basis. Lack of identification of the charged assets leads to difficulty in enforcement of security. Also, possibility that the good assets are enforced by banks while debenture holders are left with sub-par assets. Creation of charge on identified assets viz. Identified receivables, investments, cash to be created by NBFCs instead of a floating charge on entire books. Debentures to be treated as secured only on creation of identified charge. Implemented.

1) Circular on creation of security

– Documents/Consent   required   at   the   time   of entering   into DTA;

– Due diligence by DT for creation of security;

– Disclosures  in  the offer document or private placement memorandum/ IM and filing of OD or PPM/IM by the Issuer;

-Creation and registration of charge of security by Issuer prior to listing.

Due diligence:

–   No clarity as to who will bear DD expenses, in case issuer, then increased cost

–   Exemption to be provided for issuers having common DT for several issuances as DTs cannot obtain their own comments or objections as required under Para 6.1 (b) (ii) of the Circular.

–   Since issue opens and closes on the same day in case of private placement, issuers to start with the stated process much before opening of the offer.

Creation of charge-

Registration of charge within 30 days of creation, failure to be considered as breach of covenants/terms of issue. [unlike time limit of 120 days provided under Companies Act, 2013]

 To read our detailed analysis on the Circular, kindly refer to our article – ‘This New Year brings more complexity to bond issuance as SEBI makes it cumbersome’[1]

Due diligence of identified assets and Asset cover certificate
2a) ·       Pursuant to regulation 15(1)(t) of the DT Regulations, asset cover certificates are submitted to the DT on a quarterly basis by the independent auditor and on a yearly basis by a statutory auditor.

·       These aid in monitoring the adequacy of assets charged against the debt issued.

·       Format of these certificates varies for every DT and mostly indicate only a statement confirming that 100% asset cover us maintained rather than a detailed list of assets.

·    Asset cover certificates by the statutory auditor to be submitted on a half yearly basis.

·    Asset cover certificate to be made more granular to enhance monitoring of quality of assets by including the entire list of identified assets as security.

·    If quality of any asset deteriorates/ asset if pre-paid, then issuer to replace such assets and maintain asset cover as per DTD.

·    Certificate to also certify compliance with all covenants in the IM/ DTD.


1)   DT Amendment Regulations

As per amended Rule 15(1)(t) of DT Regulations, in case of listed debt securities secured by book debts/ receivables, the DT is required to obtain a certificate from the statutory auditor, giving the value of receivables/ book debts including compliance with covenants of the IM/ offer document in the manner as specified by the Board.

2)   DT Amendment Regulations

Listed entities are required to forward a half-yearly certificate regarding maintenance of 100% asset cover in respect of listed NCDs.

Not applicable to:

–        Bonds secured by a Government guarantee.

·    While it is imperative for DTs to follow a pro-active approach in monitoring of the asset cover, if the requirement to specify the entire list of identified assets (as required under the Consultation Paper) would have been implemented, the same would have made the certificate too bulky considering the amount of identified assets in the list.

·    Thus, SEBI has specified that the value of the assets would be mentioned.


·    Further, issuers may develop a shared database of receivables for the DT to monitor variations in the assets on a  real time basis which could also be subject to detailed/sample checking by the statutory auditor.

2b) Quality to be maintained as per following parameters:

·    Establishing a delinquency rate (‘DR’) benchmark (to be used as a factor for monitoring asset quality) by the DT at the time of signing of DTD.

·  If DR breaches threshold, issuer to replace such assets with standard assets.

·  Covenant for maintaining of quality of assets, conditions for replacing delinquent assets to be included in IM and DTD for transparency.

Yet to be implemented. Guidance for determination of DR benchmark should be prescribed.
Calling of Event of Default (EoD)
3) ·  Determination of EoD is inconsistent among DTs.

·  Some call DTs at DTD level and some at ISIN level.

·  The above is owing to varied practices for issuing debentures- multiple ISINs are issued under one umbrella IM/DTD or single ISIN is split across multiple tranches with different IMs.

·  Event of default (‘EoD’) to include breach of any covenant mentioned in IM/ DTD.

·  EoD to be called at ISIN level. This is because if a single investor is invested in a debenture under an ISIN, he has full right to enforce security under that ISIN.

Implemented by

1)    DT Amendment Regulations

Amended regulation 15(2)(b), event to include breach of covenants of offer document/IM and DTD.

2)    SOP for DTs

EoD shall be reckoned at ISIN level as all terms and conditions are same throughout a single ISIN. (para A.3)

Inter-Creditor Agreement (ICA)
4a) Since, security interest of debenture holders is pari passu to other lenders, DTs are approached by banks to join the Inter-Creditor Agreement (‘ICA’) for resolution plan of a borrower. However, a DT would face multiple challenges in respect of interests of the debenture holders while joining an ICA. (same has been discussed below) DTs to join ICA subject to the approval of the debenture holders.

Also, the same is subject to various conditions along with an opportunity to the DTs to exit the ICA at various stages and in various circumstances as if it never signed the same. In such cases, the resolution plan would not be binding on the DTs. (same has been discussed below)


1)      DT Regulations

As per the inserted regulation 15(7), the DT may enter into ICAs on behalf of the debenture holders subject to the approval of the debenture holders and conditions as specified by SEBI.

Inclusion of manner of voting/conditions of joining ICAs in schedule I.

2)      SOP for DTs

All the conditions as stipulated in the Consultation Paper have been adopted in the SOP. (para C.7).

Discussed below
4b) A debenture holder representative committee consisting of debenture holders having majority investment may be formed after default by the issuer in order to fast track the ICA process. 1)      SOP for DTs

DTs may form a representative committee of the investors to participate in the

ICA or to enforce the security or as may be decided in the meeting.

Clarity should be given by SEBI as to composition of the committee-whether the same will consist of debenture holders having majority across series/ISIN or series-wise/ISIN-wise should be laid in the regulations.
Voting mechanism
5a) Procedural delay viz. a long notice period of 21 days to receive consent for future course of action, would further delay enforcement of security by the DT, especially in case of joining an ICA where the review period under RBI norms is 1 month for signing the ICA. ·  Notice period for receiving consent of debenture holders to be reduced to 15 days from 21 days.

·  Negative consent for enforcement of security and positive consent for joining ICA to be taken simultaneously in the same letter.

·  Proof of dispatch and delivery to be maintained by the DT.

1)      ILDS Amendment Regulations

The amended regulation 18(2) specifies 15 days’ notice period.

2)      SOP for DTs

Process for seeking consent will be as follows:

– DTs to send 3 days’ notice to the debenture holders from the EoD.

– Positive and negative consent to be taken together as specified in the Consultation Paper

– Consent to be given 15 days.

– Meeting to be convened of all holders within 30 days from EoD.(shall not be applicable in case of public issue)

– Necessary action to be taken by DT based on consent received.

– Consent of majority of investors shall mean ‘75% of investors by value of outstanding debt and 60% of investors by number at ISIN level’.

Since the implications of entering/exiting ICA or going for enforcement actions might be huge; as such, an ordinary resolution might not suffice and a stricture approval should be specified.

Keeping that mind, SEBI has adopted an even stricture approach from a special resolution, by specifying dual condition in value and number.

SEBI has adopted the requisite consent for debenture holders from RBI norms on ICA.

5b) Contact details received from RTAs are not updated leading to difficulty in communication with the debenture holders.

Email-ids also not available as providing the same is not mandatory for debenture holders leading to hindrance in conducting e-voting.

Email-ids to be provided mandatorily for debenture holders in case of private placement. Yet to be implemented.
Creation of a recovery fund
6) In case of a default, DTs are required to fulfill their obligations to act in the interest of the debenture holders as well as enforcement of security even if they are able to recover their fees from the issuer.

The expenses towards the above the same are currently borne by the debenture holders in most cases.

Due to lags in receiving the money on time, there is a delay in the enforcement of the security.

·  A recovery fund to be created towards at the time of issue of debentures that will be used by DTs for recovery

·  Proceeding expenses.


·  Value of fund= 0.01% of issue subject to maximum of 25 lakhs per issuer.


·  The same will not be applicable on ‘AAA rated’ bonds. However, in case of downgrading of rating, issuer will be obligated to create such fund.

·  Amount to be returned to the issuer at the time of maturity in case of no default.


1)      ILDS Amendment Regulation

The inserted regulation 26(7) of ILDS Regulations specifies that a recovery expense fund will be created in the manner specified by SEBI and also inform the DT about the same.

Amendment in schedule I to insert details of creation of recovery expense fund and the details and purpose thereof.

2)      DT Amendment Regulations

Duties of DTs to include ensuring the implementation of the conditions relating recovery expense fund under regulation 15(1)(h).

3)      Circular on Recovery fund

Details relating to creation, operation, maintenance and refund of the recovery fund has been specified.

The statutory auditor should certify, besides the asset cover, that the recovery fund is being adequately maintained, and well demarcated from other general funds of the company.



Disclosures on the website by DTs
7) While the DT Regulations mandate various duties on DTs, investors are generally not aware of the monitoring by the DTs as well as the compliance status of issuers regarding covenants of the IM. DTs to be mandatorily required to provide minimum disclosures on their website viz. Quarterly compliance report, defaults by the issuer, compliance status of asset cover, maintenance of various funds by the issuer, status of proceedings of cases under default etc.

This would enhance transparency and hold the DTs responsible.

Yet to be implemented The intention behind such disclosures is to promote transparency in the performance of DTs. Keeping the same in mind, SEBI should instruct issuers to provide the link of such website in the IM as well as annual report of the issuer, in addition to the disclosure of details of the DT  [as required under regulation 53(e) of LODR regulations] for the information of the investors.
Disclosures regarding Performance of DTs
8) There exists no performance indicators to enable investors to ascertain the performance of a DT. Disclosure to be made by DTs w.r.t. the following parameters to reflect their performance:

– timeliness of action taken

Monitoring of covenants

Effectiveness in enforcing securities or taking remedial actions in case of default, etc.

Yet to be implemented ·       DTs should also report at prescribed intervals that they have monitored the asset cover in the prescribed duration, and have obtained auditor’s certificate, and in their independent assessment, there is no deterioration in the asset cover, both in terms of value and quality. In case, they have observed any deterioration, the same should be disclosed, and reported along with steps taken to rectify the same.
Public Disclosure of all covenants by the issuer in IM
9) ·       There are instances where issuers enter into separate agreements with debenture holders containing additional/ specific covenants that do not form part of the principal IM.

·       These agreements, known as ‘side letters’ contain an accelerated payment clause” which states that if the borrower violates the terms of the covenants, including default or

·       downgrade of debt, such lender is entitled to

·       demand immediate repayment.

·       Such clauses hamper the interests of the issuer as well as other lenders.

·     All covenants including the ‘accelerated payment clause’

·     Shall be incorporated in the IM.

·     Issuer to inform DT of such covenants for monitoring the same.

·     Also, para 3.11 states that the IM should disclose that it has no side letter with any debenture holder except as disclosed in the

·     IM and on the stock exchange website where the debt is listed.

Implemented by the ILDS Amendment Regulations amended schedule I of the ILDS Regulations to include details of all covenants of the issue (including side letters, accelerated payment clause, etc. Instead of allowing side letter to be a part of the IM, the concept of side letter should be discouraged totally. All covenants should be there in the IM only.

The issuer should also be made to undertake in the IM that it has not signed any side letter and that all covenants as included in the IM are the only covenants agreed to by the issuer.

Standardization of Debenture Trust Deed (DTD)
10) A DTD consists of standard covenants as specified under DT Regulations and as per form SH-12 under Companies Act, 2013 as well as customized clauses specific to an issuer.

DTDs are lengthy and thus should be standardized to make them comprehensible and easy to read and understand.

DTD to be bifurcated into two parts:

– Part A: generic and standard clauses common to all DTs.

– Part B: specific and customized clauses relevant to the particular issue for which the DTD is executed.

(same as per offer document of mutual funds)


1)      ILDS Amendment Regulations

Regulation 15(2) has been amended to provide that the trust deed shall consist of 2 parts:

a) Part A containing statutory/standard information pertaining

to the debt issue

b) Part B containing details specific to the particular debt issue

2)      DT Amendment Regulations

Regulation 14 amended to include that trust deed shall consist of 2 parts:

(same as ILDS Amendment Regulations)

SEBI should provide clarity as to what clauses would fall under part B.
Enhanced Disclosures
11) Details about the terms of the debentures, duties of DTs and redressal mechanisms in case of default, are not known to the investors.

The investors thus are not fully aware of the risks undertaken while investing.


In order to enhance transparency, the issuer is required to provide additional disclosures in the IM such as:

– A risk factor to state that while the debenture is secured against a charge to the tune of 100% of the principal and interest amount in favour of DT, the possibility of recovery of 100% of the amount will depend on the market scenario at the time of enforcement of security.

– That the issuer has no side letter

– Pari passu charge of the investors, etc.

Partly Implemented

1) ILDS Amendment Regulations

Schedule I of the ILDS Regulations has been amended to include a note as to the risk factor.

SEBI to also make necessary amendments in order enable inclusion of other disclosures as well.
Framework and Standard Operating Procedure(SOP) for imposing fines
12) There have been a lot of instances of non-co-operation of the issuers as well as violations of the LODR Regulations by the issuer. Actions and adjudication proceedings initiated in this regard by the DT, usually take up a lot of time and the, non-compliance may continue during such proceedings as well. An SOP to be prepared that would list out penalties for specific violations by the issuer.

This would enable better compliance and co-operation on the part of the issuer.

Yet to be implemented

Points for consideration:

There are certain issues in the Consultation Paper that if not thought through would pose various complications in their implementation.

1) Creation of charge on identified assets

The Consultation Paper aims to discourage floating charge on the entire balance sheet and requires that debentures are to be secured by way of a charge on identified assets which would include identified receivables, investment and cash. Further, the debentures would be considered secured only if the charge is created on identified assets of the NBFC.

The rationale for the above is that, unlike other Companies where there are fixed charges created, NBFCs usually create a floating charge in favour of lenders. The problem arises when all such lenders are secured by way of pari passu charge on the entire receivables of the NBFC. The same leads to lack of identified/ specific security interest for each lender leading to difficulty in the enforcement of the same. Further, there is a change that the higher quality assets are handed over to banks and other major lenders, leaving only the sub-par assets in favour of the debenture holders.

Our comments:

Receivables are floating assets and are dynamic in nature. The intention of SEBI is to mandate NBFCs to create a pool of assets as identified asset towards secured debentures. Thus, creating a demarcated pool of receivables as security interest in debentures would not be possible as the pool would still keep fluctuating due to various transactions such as repayment, prepayments and default.

Thus, even if there is an identified pool created, the same would still be a floating charge due to various fluctuations.

In our view, the approach adopted by the Consultation Paper is akin to covered bonds where there is a pool of assets (identified assets) monitored by a pool monitor (DT). Hence it is suggested that SEBI gives recognition to covered bonds.

Amendment under IBC:

Currently, IBC does not make any express distinction on the basis of floating or fixed charge, and both such charges are treated as secured debentures in the waterfall under IBC. However, flaoting charges are subservient to fixed charges. Thus, an amendment would be required under IBC regarding the same.

The above recommendation is still required to be implemented

2) Joining the ICA by the DTs on behalf of the debenture holders

Firstly, the ICA applies to institutional investors alone. Hence debenture holders that would fall under the above category would only be allowed to be a part of such ICA.

Secondly, the rights of debenture holders also depend on the nature of the charge- when the same is exclusive or pari passu. It is only when the rights are par passu that the debenture holders will be required to be a part of the ICA.

The recommendations under the Consultation paper have been implemented by the SOP for DTs wholly.

The provisions relating to the same allow a way-out to the DTs in various circumstances and exit the ICA altogether, for instance, if the resolution plan is not in accordance with SEBI regulations, if terms of ICA are contravened by any party, if the resolution plan is not finalized within 180 days from the review period (with an extension upto 365 days). Under these circumstances, if the DT exits the CIA it will treated as if it never entered the ICA and the same will not be binding.

Now the above leads to various problems:

  • If the DT will be treated as exiting the ICA altogether, would that mean that DT could now take independent action? Since the language used is ‘ it will be treated as if the DT never entered the ICA’. [Lenders as party to the ICA, along with dissenting lenders, are prohibited from initiating any other legal action/ proceeding against the borrower, including proceedings under IBC]
  • If the DT initiates insolvency proceedings under IBC, how will the lenders be a part of the committee of creditors since they are barred from taking any other action?
  • How would the DT enforce security that is equally in favour of the other lenders as well?
  • In case of joint financing of a secured asset, consent of a minimum of 60% (in value) of creditors is required under SARFAESI to initiate enforcement action. Therefore, the debenture holders may not be having a practical solution by exiting the ICA.
  • Lastly, resolution of an entity is a collective process, and the process might require collective compromises as well. If creditors are provided exceptions, it is difficult to find success of either of the proceedings. Individual actions against the company can erode the asset base to the prejudice of the Company.

3) Certification of covenants under the asset cover certificate

As per regulation 56(1)(d) of the amended SEBI LODR Regulations,

The listed entity shall forward the following to the debenture trustee promptly

(d) a half-yearly certificate regarding maintenance of hundred percent asset cover or asset cover as per the terms of offer document/Information Memorandum and/or Debenture Trust Deed, including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results:

Thus the question arises as to what does ‘including compliance with all the covenants’ mean and what kind of covenants are required to be certified.

As per the rationale provided under the Consultation Paper and Discussion (Agenda) in the SEBI Board Meeting dated 29th September, 2020

  1. Consultation paper:

(i) Requirement for the asset cover certificate falls under the head ‘Due diligence and monitoring of asset cover by DT’ in the consultation paper;

(ii) As per para 3.2.2 of the consultation paper,

Point c- Issuer shall disclose the covenants of maintaining the quality of assets, conditions of replacing the bad/ delinquent assets in IM and DTD to create transparency and reduce the information gap regarding the covenants of the charge creation and the process thereafter.

Point d-The asset cover shall also certify the compliance with all the covenants mentioned in the IM or DTD, as applicable.

Thus, both the above points should be read in conjunction.

  1. SEBI Board Meeting dated 29th September, 2020

(i) Also reference should be made to paras 9.2.2, 9.2.3, 9.2.6, 9.2.7, 9.2.8 of the Agenda of the Board Meeting.

(ii) As per para 9.2.6, However, certain types of undertakings in support of creation of charge such as personal guarantee, negative lien are not registered with any independent agencies and hence there exists the issue of verification of such undertakings. Therefore, disclosures with respect of these undertaking need to be made in the offer document/ Information Memorandum.

Amended regulation 56(1)(d)- a half-yearly certificate regarding maintenance of hundred percent asset cover or as per the terms of offer document/ Information Memorandum including compliance with all the covenants, in respect of listed non-convertible debt securities, by the statutory auditor, along with the half-yearly financial results.

Our view:

Thus, on a holistic reading, it is observed that SEBI intends to monitor the quality of the charged asset. For the same, SEBI has instructed issuers to include undertakings i.e. covenants, in support of creation of charge such as personal guarantee, negative lien in the offer document/ IM/ DTD and compliance with such covenants needs to be ensured. Thus, ‘including compliance with all covenants’ under the amended regulation 56(1)(d) should be read in reference to maintenance of asset cover.

Therefore, statutory auditors will be required to only certify those covenants that revolve around the asset cover of debt securities.


SEBI has focused in strengthening the role of DT in case of default by issuers of listed debt securities. Thus, the measures as stated above are truly in the right direction and would help in easing the strained enforcement of rights of debenture holders. While most of the measures are a welcome moves, there are some moves that may be too ambitious and would definitely require thorough consideration.

Our write-up/video can be accessed below:

1. SEBI responds to payment defaults by empowering Debenture Trustees:

2. This New Year brings more complexity to bond issuance as SEBI makes it cumbersome

3. Youtube Channel:

4. Other write-ups:









Schemes of Arrangement under the Scanner

Listed Companies made subject to stricter scrutiny and multilevel approvals

-Megha Mittal


With the objective of empowering the stock exchanges and streamlining the processing of draft schemes filed with the stock exchanges, the Securities and Exchange Board of India has issues a Circular dated 3rd November, 2011[1] (“Amendment Circular”) thereby amending the Circular dated March 10, 2017[2] (“March, 2017 Circular”) which lays down the framework for Schemes of Arrangement by listed entities and relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The Amendment Circular shall be effective for scheme submitted to the Stock Exchange after 17th November, 2020 and for those companies which are either listed, seeking to be listed or awaiting trading approval after 3rd November, 2020.

Schemes of Arrangement is unarguably a material event for the listed company, and as such, optimum transparency, disclosure by the company, coupled with stringent checks by the Committees, viz Audit Committee and Committee of Independent Directors, becomes a very crucial factor for decision making by the shareholders.

The Amendment Circular primarily aims at ensuring that the recognized stock exchanges refer draft  schemes  to  SEBI  only  upon  being fully convinced that the listed entity is in compliance with SEBI Act, Rules, Regulations and circulars issued thereunder. While the amendments introduced, bring to light the tenet of the regulatory bodies to ensure higher levels of transparency and disclosures with respect to the proposed schemes, there also seems to be an underlying tone of stress and responsibility that has been imposed on the Audit Committee and Independent Directors to assess the viability of the proposed Schemes.

In this article, the author has given a detailed comparison of the provisions, before and after the Amendment Circular, along with comments on the same.

Read more

SEBI subtly mandates debt listed companies to prepare quarterly financial results

Stock exchange circular stipulates submission of financials not older than 6 months

Aanchal Kaur Nagpal | Senior Executive, Vinod Kothari & Company


NSE, vide clarification dated 14th July, 2020[1], has clarified that audited financials or unaudited financials with limited review, submitted by issuers for listing of their privately placed debentures, including for the stub period, shall not be older than 6 months from the date of the private placement disclosure document.

Schedule I to SEBI (ILDS) Regulations, 2008 mandates furnishing financial parameters upto latest half year in the offer document in addition to providing abridged version of audited consolidated (wherever available) and standalone financial information ( like profit & loss statement, balance sheet and cash flow statement) for at least last three years and auditor qualifications , if any and abridged version of latest audited / limited review half yearly consolidated (wherever available) and standalone financial information (like profit & loss statement, and balance sheet) and auditors qualifications, if any.

There was no express requirement that the half yearly financial results being submitted cannot be older than 6 months. In case of Commercial Paper (‘CPs), SEBI had expressly specified that the audited financial statements to be submitted by an issuer intending to list its CPs, shall not be older than 6 months from the date of the application of listing. [Para 5.2 of Annexure I of SEBI Circular on Framework for Listing CPs dated 22nd October, 2019[2]]

Carve out from the above requirement was provided, as amended vide SEBI Circular dated December 24, 2019[3], to listed issuers who were in compliance with SEBI (LODR) Regulations, 2015. Such listed entities could file unaudited financials with limited review for the stub period in the current financial year, subject to making necessary disclosures in this regard including risk factors.


While a clarification in the above context was much needed, however the requirement for financials to be not older than 6 months would pose difficulties on debt-listed companies.

Debt listed entities are required to prepare financials (unaudited or audited) on a half yearly basis within 45 days (except in case of advance intimation) from the end of each half year [Regulation 52(1) of LODR Regulations] while equity listed entities are required to prepare the financials on a quarterly basis within 45 days from the end of each quarter and within 60 days from the financial end of the year for annual financials.

The aforementioned clarification will not impact the following companies:

  1. Equity-listed entities intending to list their privately placed debentures as they would be preparing quarterly financials;
  2. Debt-listed entities that are subsidiaries of equity-listed entities as they would be required to prepare quarterly financials for the purpose of consolidation with their holding equity-listed entity.

However, debt listed entities that are neither subsidiaries of equity listed entities nor having their specified securities listed, won’t be able to raise funds pursuant to issuance of NCDs if the financials are older than 6 months.

Debt-listed entities are required to prepare their financials within the following due dates:

Period of Financials Due Date Period during which financials would be more than 6 months old
Half year ended 31st March 15th May 1st April to 14th May
Half year ended 30th September 15th November 1st October to 14th November

For e.g. a debt listed entity won’t be able to list debt securities on Oct 1 based on financial results of March 31. Such companies will have to either prepare quarterly financials till June 30 or get the half yearly results for September 30 finalized on priority.

Clarity or Complication?

The said NSE clarification serves as a complication rather than a clarity. The said circular strains the ability to raise funds by debt-listed entities. NBFCs too would take a huge hit due to the said restriction on raising funds during periods where latest financials are not available. Where the world is already in a crisis due to the COVID-19 pandemic, liquidity of the debt market becomes all the more crucial.

On one hand, SEBI has mandated Large Corporates to raise minimum 25% of their incremental borrowings, by way of issuance of debt securities (as defined under SEBI ILDS Regulations), and on the other restriction by way of the said clarification has been imposed wherein the debt listed entities will have to prepare financials on a quarterly basis to be able to issue and list privately placed debt securities as and when there is requirement of funds.

Our other relevant resources –




SEBI completely restricts Retail Investors from AT1 instruments

Qasim Saif | Executive

Perpetual Non-Cumulative Preference Shares (PNCPS’) and Innovative Perpetual Debt Instruments (IPDIs) / Perpetual Debt Instruments (PDIs) (commonly referred to as AT1 instruments) are a kind of perpetual bonds without any redemption date that banks issue to meet their long term capital as well as their Additional Tier-I capital requirements. These instruments are treated as quasi-equity instruments, providing a unique blend of characteristics, that is, coupling the perpetual availability of funds with fixed periodic payments.

Despite having unique characteristics, the AT1 bonds are seen with distrust by investors because such instruments are more likely to default and in some circumstances carry more risk of non-repayment than equity. The return on such bonds is higher than tier 2 bonds however is significantly lower than the return on equity.

Recently, the AT1 bonds were all over the news when the Reserve Bank of India wrote down the liability towards the AT1 bonds issued by Yes Bank, without affecting the equity shareholders, resulting in a large number of people, including senior citizens, losing their savings who were lured to invest in AT1 bonds instead of fixed deposits, with a promise to pay higher returns. Our detailed write-up on this topic can be viewed here.

This write-up, however, deals with the recent changes brought in by SEBI for the listing of AT1 bonds.

Amendments proposed by SEBI

Though the AT1 Bonds are regulated by RBI guidelines issued in consonance with Basel III norms, however public issues and listing of these bonds are regulated by SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.

SEBI on October 6, 2020,[1] issued a circular containing additional guidelines in regards to the issuance, listing and trading of AT1 Instruments. The additional guidelines are based on recommendations of the Corporate Bonds and Securitization Advisory Committee set up by SEBI. The Circular shall come into force with effect from October 12, 2020.

The additional guidelines prescribed and its analysis is as follows-

  1. Mandatory issuance through electronic book building platform

SEBI vide circular dated January 05, 2020,[2] mandated issuance of debt securities exceeding rupees two hundred crores to be undertaken through the electronic book building platform (“EBPF”). Now, SEBI has mandated that the issuance of AT1 instruments shall be compulsorily done through EBPF irrespective of the issue size.

Further, the January 2020 Circular did not include AT1 bonds, however, the October Circular has specifically included AT1 bonds within its ambit.

EBPF is deployed in large size issue because of the novelty of the system and higher cost as compared to other alternatives. However, the latest amendment on the use of EBPF irrespective of the issue size will increase smaller issuances costly, therefore, making them unviable.

  1. Only QIBs shall be allowed to participate in an issue

The most important change is that now only QIBs shall be allowed to participate in the issuance of AT1 bond; retail and other non-QIB investors have been excluded from the list of eligible investors to AT1 bonds.  The amendement is made with an intent to safeguard the retail investors from the risk possed by such instruments, as these complex instruments carry certain risk that are not generally not understood by the common people

The QIBs are better equipped for analyzing potential risk and whether or not such issuance is worth investing compared to other classes of the investor, this would hence form the first line of defense to protect the other investors, who would be benefited with skills and resources of QIBs.

This change however directly conflicts with the RBI Guidelines on this issue, which allows banks to issue AT1 bonds to retail investors with permission of its board via amendments to implementation of Basel III Capital Regulations in Indian on date September 1, 2014[3]

In any event, if the AT1 bonds are taken for listing, the conditions under SEBI Circular will have to be fulfilled and therefore, the issuances shall have to be restricted to QIBs only.

It shall be noted that the restriction is only on the issuance of securities and non-QIB investors can still purchase the securities from the open market.

However, there might be still concerns that such QIBs might engage in selling securities by misleading investors as it was alleged in the case of Yes Bank.

  1. Allotment and trading lot fixed

SEBI has further specified the minimum allotment of AT1 instruments shall not be less than rupees one crore and further the minimum trading lot is also fixed at rupees one crore.

As mentioned above that though retail investors may not be able to participate in issuances, they might purchase the bonds from stock markets, to further deter retail investment in such instruments the trading lot has also been fixed at rupee one crore.

The fixing of minimum allotment size may not be of major importance as the issuance would only be to QIBs who, usually invest larger sums of money, however, minimum allotment size is generally kept in parity with trading lot size to create a uniform lot of securities and avoid forming of odd lots, hence fixing of minimum allotment size is mainly to bring it with parity with trading lot size.

  1. Increased disclosure requirements

Issuers of AT1 bonds are required to make disclosures as prescribed under Schedule I of SEBI (NCPRS) Regulations, in addition to that the issuer shall now have to make disclosures that are prescribed under Annex I and provisions of circulars mentioned in Annex II of the October Circular.

Along with that specific disclosures about the following shall have to be made in the offer document:

  1. Details of all the conditions upon which the call option will be exercised by them for AT1 instruments
  2. Risk factors, to include all the inherent features of these AT1 instruments such as discretion of issuer in terms  of  writing down the principal  / interest, to skip interest payments, to make an early recall etc. without commensurate right for investors to legal recourse,even if suchactions of the issuer mightresult in potential loss to investors.
  3. Point of Non-Viability clause: The absolute right, given to the RBI, to direct a bank to write down the entire value of the outstanding  AT1 instruments/bonds,  if it thinks the bank has passed the Point of Non-Viability or requires a public sector capital infusion to remain a going concern.

These additional disclosures will give the investors a better understanding of the instrument and what they are signing up for.

Impact on currently listed AT1 Bonds

The majority of additional guidelines are in respect of securities that would be now be issued hence would have no impact on bonds already issued/listed on securities market. However, the conditions with respect the trading lot could impact the holders of AT1 bonds as they might have investments, not in multiple of one crore, which might result in the creation of odd lots.

Generally, special windows are provided by stock exchanges where investors can sell their odd lots to the market maker, intermediaries, or other concerns hence a special window, in this case, might be provided to deal with odd lots that might be created due to additional guidelines.


Given the tone of the changes made by the SEBI, it is very clear that the changes are highly inspired by the events that led to retail investors burning their hands in the case of Yes Bank. Most of the changes seem to carry the intent of deterring the retail investors from investing in these securities. The following paragraph from the circular makes the situation clear:

“Given the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion is available to an issuer, may not be understood in the truest form by retail individual investors.”

Additional guidelines would without doubt restrict retail investment in AT1 bonds however, the added conditions in likelihood would jeopardize whatever little interest investors had on this product. Though the protection of investors is a goal of SEBI, so is the promotion of capital markets in India; hence, the regulation might be welcomed on the investor protection front but there are serious doubts on how good it will do for the development of the AT1 bonds market in India.

Links to related articles –