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1. Changes in Ownership Structures:

India is witnessing a massive transition from promoter-led ownership to institutional investor-backed models, completely shifting the compliance paradigm. Where family-managed companies once relied on trust and informal, need-based documentation, investor-managed businesses demand strict policies, robust processes, clear rationale, and thorough record-keeping.

Furthermore, Indian promoter shareholding has largely transitioned from individuals to trust entities. This requires compliance officers to master the legal nuances of multiple jurisdictions. Without this deep understanding, navigating essential tasks like share transmission, Significant Beneficial Ownership (SBO) identification, and promoter group classification becomes impossible.

Similarly, new-age startups often lack a single controlling group, creating legal ambiguities. Regulators have yet to fully address questions like: Who is the actual promoter—the founder or the investor? Who exercises real control or significant influence? Can an individual with minimal economic interest still trigger SBO compliances? Compliance officers must proactively navigate these gray areas.

2. Changes in Business Models:

These ownership shifts, coupled with market disruptions, make business models highly volatile. This volatility makes financial forecasting unpredictable, causing threshold-based compliance requirements to fluctuate rapidly. Sectors like fertilizers, data centres, IT, and automobiles are undergoing massive structural shifts. These changes trigger reorganizations, altering management structures and re-designating key personnel under corporate and insider trading laws.

As business models shift, the definition of Price Sensitive Information (PSI) becomes highly dynamic. While regulators might only scrutinize these actions years later, compliance officers must pre-empt risks and align internal frameworks immediately. These shifts often spark mergers and restructuring, which disrupt reporting lines and lead to sudden executive turnover. This requires immediate regulatory filings and a concerted effort to induct and train incoming management. Additionally, corporate restructuring constantly alters the matrix of Related Parties and Related Party Transactions (RPTs), increasing the compliance burden. The compliance officer cannot be a passive spectator; they must be the strategic architect of agile compliance frameworks.

3. Changes in Memorandum and Articles of Association:

As these business models and internal structures reorganize, they inevitably demand immediate alterations to a company’s foundational legal charter. Consequently, the days when the Memorandum of Association (MoA) was referenced only in exceptional situations are gone. Dynamic business pivots mean the MoA must be reviewed and updated frequently. Similarly, the shift from promoter-led to investor-funded organizations requires significant overhauls of the Articles of Association (AoA) to govern new corporate behaviors. Compliance officers must meticulously draft these documents to prevent conflicting interpretations. As department leaders, they must also ensure their teams fully grasp the practical interplay between these foundational documents.

4. Changes in Capital Structures:

The revisions made to these constitutional documents are often driven by a fundamental shift in how corporations fund their growth. Despite India’s steady GDP growth of 6–7%, capital raising has surged over the last few years, fundamentally altering debt-to-equity ratios across industries. Decades ago, a 1:3 ratio was standard. Today—outside of capital-intensive sectors like infrastructure and aviation—equity capital has significantly outpaced debt. While this provides corporate stability, it compresses the return on capital, changing the entire corporate risk dynamic.

With companies launching more capital issues than ever, compliance professionals must adeptly manage these complex transactions. Simultaneously, regulatory processes for issuing capital have become much stricter. Decisions regarding pricing, timing, and investor selection must be thoroughly documented and justified to pre-empt future litigation or shareholder allegations.

On the debt side, banks are competing fiercely for deposits, the government is heavily promoting debt securities, and foreign currency loans are increasingly accessible. This environment requires a distinct compliance mindset focused on debenture trustee compliances, debt listing requirements, foreign exchange regulations, and insolvency risks. As banking transitions toward digital lending and NBFC-dependent models, lender priorities are shifting. Compliance officers—whether representing the lender or the borrower—must align their governance practices with the changing expectations of regulators, investors, and creditors. These expectations manifest in stricter asset-liability mismatch monitoring, enhanced CARO reporting, evolving credit rating parameters, and new pooled investment vehicles. Positioned correctly, this environment offers a massive growth opportunity for the profession.

5. Changes in CXO Tenures:

This continuous influx of external capital and the resulting demand for performance place intense pressure on executive management, fundamentally reshaping leadership stability. The era of lifelong, committed corporate executives is fading; attrition rates at the CXO level have risen sharply. In top-down corporate structures, this churn creates high volatility. As Indian companies transition from promoter-managed to professionally run enterprises, the fierce demand for talent has led to shorter CXO tenures and more transactional board expectations. For the compliance officer, this means the organization’s compliance culture must be institutionalized. It cannot depend on individual business leaders. It requires an agile approach to onboarding changing leadership, paired with an uncompromising stance on core governance frameworks to protect the corporate entity.

6. Changes in Talent Pool and Retention Strategies:

When leadership at the very top becomes highly transitional, it ripples downward, forcing a total rethink of how the entire professional talent pool is developed and retained. The supply of professional talent is shaped by shifting academic frameworks and societal perceptions of the profession. Conversely, demand is driven by increasing legal complexity, stricter enforcement, litigation, and technological disruption. To thrive, compliance leaders must embrace advanced regulatory technologies while aggressively investing in human capital. Understanding the evolving beliefs and workplace behaviors of younger generations, mapping them to industry expectations, and building robust learning and development structures is now an urgent priority.

Conclusion: Unlearning for Effective Adaptability:

While compliance deals with a defined universe of statutory laws, the execution of those laws must adapt to volatile macroeconomic factors. Therefore, unlearning past methodologies is critical. What succeeded yesterday guarantees nothing for tomorrow. Because the human brain relies naturally on familiar memories and patterns, intentional unlearning is the hardest hurdle to clear when trying to adapt. Compliance professionals must master this mental shift—maintaining operational peace while executing dynamic, deeply reflective governance strategies.

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The Core Question: How Much Checking is Enough?

In every IPO, one practical question arises for merchant bankers: how far must they go while checking disclosures? Is it enough to rely on documents, certificates and confirmations given by the issuer, or must they independently test the information before investors rely on it?

This article looks at what “reasonable due diligence” means in an IPO, who is responsible for it, what SEBI has said in key orders, and what merchant bankers should take away from these cases.

Due Diligence and Why It Matters

Due diligence means the reasonable care and effort expected from a person while satisfying a legal requirement or discharging an obligation[i].

An IPO is built on trust. Investors do not have direct access to the internal records of the issuer. They rely on the offer document, statutory disclosures and the assurance that the issue has gone through professional scrutiny. This is where the role of a merchant banker becomes critical.

Legally, the issuer remains responsible for the disclosures made in the offer document[ii]. However, SEBI’s regulatory framework does not treat the merchant banker as a mere compiler of information. The lead manager is expected to examine, question and satisfy itself that the disclosures are true, adequate and not misleading. At the DRHP stage itself, the lead manager must exercise due diligence and satisfy itself about the truth, adequacy and completeness of disclosures. Failure to verify or act on a material issue may lead to regulatory consequences under the Merchant Bankers Regulations[iii] and, if enacted, the proposed Securities Markets Code[iv].

Who is Responsible for Due Diligence?

Regulation 24 of the SEBI ICDR Regulations requires the draft offer document and offer document to contain all material disclosures which are true and adequate so that investors can make an informed investment decision. It also requires the lead manager to exercise due diligence and satisfy itself about all aspects of the issue, including the veracity and adequacy of disclosures.

The Merchant Bankers Regulations also require a merchant banker to exercise due diligence, ensure proper care and apply independent professional judgment. Therefore, the issuer’s responsibility and the merchant banker’s responsibility operate separately. One does not replace the other.

Due Diligence Does Not Mean Perfection

The difficulty lies in understanding the standard itself. Due diligence cannot mean that the merchant banker must discover every possible undisclosed fact or every concealed irregularity. That would make the obligation impossible. At the same time, it also cannot mean that the merchant banker may simply rely on management confirmations, certificates or undertakings without applying its own mind.

This balance was clearly brought out in the Veerkrupa Jewellers matter. SEBI relied on the Supreme Court’s decision in Chander Kanta Bansal v. Rajinder Singh Anand, where due diligence was explained as reasonable diligence, that is, doing everything reasonable and not everything possible. SEBI further observed that the degree of care expected from a merchant banker will differ from case to case and cannot be put into a straight-jacket formula.

The Real Test: What Would a Reasonable Merchant Banker Do?

That is the real test. The question is not whether the merchant banker discovered everything. The question is whether a reasonable merchant banker, placed in the same facts, would have made further enquiries, asked for more documents, issued a clarification, or escalated the matter.

SEBI’s approach in IPO matters shows that the obligation becomes stricter when there are red flags. If there are inconsistencies in documents, unusual routing of funds, unexplained related party arrangements, doubtful vendors, aggressive publicity, GMP-based promotion, or any other material fact which could influence investor decision-making, the merchant banker cannot remain passive.

What SEBI Has Said:

1. Lessons from PG Electroplast[v]

In the PG Electroplast matter, Almondz acted as the Book Running Lead Manager. The concern was that the offer document contained material gaps / misstatements, and the merchant banker did not go beyond the information and documents placed before it. SEBI found that Almondz had not exercised due diligence and proper care while acting as BRLM. SEBI also observed that filing an offer document through a merchant banker is not a mere ritual, and due diligence does not mean passively reporting whatever is reported to the merchant banker. SEBI therefore restrained Almondz and its concerned officials from taking up any new issue-related assignment till further directions.

Learning: A merchant banker cannot treat issuer-provided documents as final. It must independently test material disclosures, ask further questions and identify issues which may affect investors.

2. Lessons from Bharatiya Global Infomedia^[vi]

In the Bharatiya Global Infomedia matter, the issuer argued that the documents were made available to the merchant banker and that the offer document was prepared on the advice of the merchant banker. It also tried to say that any misstatement, omission or non-disclosure should not be attributed to it. SEBI did not accept this argument. SEBI held that the issuer cannot escape responsibility by shifting the burden of preparation of the offer document to the merchant banker, because the issuer and signatories certify that the disclosures are true and correct.

Learning: Issuer responsibility and merchant banker responsibility run separately. The issuer cannot blame the merchant banker, and the merchant banker also cannot rely only on issuer confirmations as a substitute for its own diligence.

3. Lessons from Trafiksol^[vii]: Verification of Objects of Issue

In the Trafiksol matter, the prospectus stated that ₹17.70 crore would be used for purchase of software from a third-party vendor. A complaint questioned the vendor’s financials and credentials. During examination, documents relating to the vendor were submitted through the company and merchant banker, but SEBI found serious concerns with the vendor’s profile, client list and capability. SEBI rejected the company’s defence that it merely forwarded documents without verifying their authenticity and directed refund of IPO money to investors. Importantly, SEBI clarified that the role of the merchant banker was being dealt with separately.

Learning: Objects of issue cannot be checked mechanically. If IPO proceeds are proposed to be used for a specific vendor, asset, software or project, the basis of that object must be verified with care.

4. Lessons from Veerkrupa Jewellers[viii]: Publicity and Post-Filing Conduct

Veerkrupa Jewellers adds another dimension: due diligence does not end with the filing of the offer document. In that matter, SEBI examined IPO-related publicity, including online articles and YouTube videos.

SEBI noted that public communications relating to an IPO must contain only information from the draft offer document or offer document, and such information must be truthful, fair and not misleading. SEBI also held that although a merchant banker may not be able to monitor and control every promotional activity, the lead manager ought to act promptly once misleading publicity comes to its knowledge.

SEBI found that failure to act promptly fell short of the merchant banker’s duties relating to due diligence and investor protection. This gives an important practical takeaway. A merchant banker’s role does not stop at checking the draft offer document. The obligation continues through the issue process and, in suitable cases, may require monitoring of public communications, market narratives and investor-facing content connected with the IPO.

The Three Layers of Reasonable Due Diligence

Reasonable due diligence has three layers.

First, the merchant banker must verify what is disclosed. This means checking documents, board approvals, financial records, related party disclosures, material contracts, objects of issue, litigations, group-company information and other material statements in the offer document.

Second, the merchant banker must test what is not clearly disclosed. If a fact appears incomplete, inconsistent or commercially unusual, the merchant banker must go beyond the checklist. The obligation is not satisfied merely because a certificate or undertaking is available.

Third, the merchant banker must act when new facts emerge. If misleading publicity, new litigation, regulatory action, vendor-related concerns or other material developments arise during the IPO process, the merchant banker must consider whether clarification, corrigendum, escalation or further disclosure is required.

Conclusion

Reasonable due diligence is a professional judgment standard. It asks a simple question: did the merchant banker act as a reasonable, careful and independent professional would have acted in those facts?

If the answer is yes, the merchant banker should be able to defend its conduct. If the answer is no, the issue may be viewed not as a missed fact, but as a failure of due diligence.

So, where does SEBI draw the line? SEBI does not expect a merchant banker to do the impossible. But it does expect the merchant banker to act like a careful professional. If an issue could have been identified through reasonable checks, and the merchant banker failed to ask, verify or act, the lapse may be treated as a due diligence failure.

In an IPO, that distinction matters. The offer document is not just a legal document. It is the basis on which public investors decide whether to part with their money. That is why SEBI expects merchant bankers to walk the fine line carefully, not to do everything possible, but to do everything reasonable.

[i] Balk’s Law dictionary

[ii] Refer Section 35(1) and Section 34 of the Companies Act, 2013; Regulation 24 of the SEBI ICDR Regulations, 2018.

[iii] SEBI (Merchant Bankers) Regulations, 1992 – Regulation 13 read with Schedule III, Code of Conduct for Merchant Bankers.

[iv] Section 92(e) of proposed Securities Market code

[v]  https://www.sebi.gov.in/sebi_data/attachdocs/1325082567899.pdf

[vi]  https://www.sebi.gov.in/sebi_data/attachdocs/1407493307381.pdf

[vii] https://www.sebi.gov.in/enforcement/orders/dec-2024/order-in-the-matter-of-trafiksol-its-technologies-ltd_89239.html

[viii] https://www.sebi.gov.in/enforcement/orders/may-2026/order-in-the-matter-of-m-s-veerkrupa-jewellers-limited-_101736.html

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Background

The implementation of the labour codes in November 2025 has created a material financial impact for many companies, especially in relation to gratuity and leave encashment. In several cases, actuarial valuations have resulted in a one-time charge in the books, and a substantial portion of that charge relates not to the current year’s service, but to employee service rendered over earlier years.

This has raised a practical question under Section 198 of the Companies Act, 2013: While computing net profits for CSR and/ or managerial remuneration, should such a one-time charge be excluded to the extent it pertains to past periods?

At first glance, the question seems reasonable. If the liability relates to service already rendered in earlier years, should the entire expense really be considered while computing profits of the current year?

The answer, however, may lie less in the period to which the service relates and more in the nature of the liability itself.

Nature of the Liability

The first distinction that matters is between a hypothetical provision and a crystallised business obligation. Many disallowance issues arise in relation to doubtful debts, anticipated losses, or other provisions where the existence or quantum of the liability is uncertain. Those are estimates of possible future losses.

Gratuity and leave encashment are different. These liabilities arise from a definite statutory and contractual obligation owed by the employer to its employees. The obligation is not speculative. Employees have already rendered service, and the employer has already accrued the liability. The actuarial valuation only determines the present value and timing of its discharge.

So, even though the accounting entry is described as a “provision”, the substance is not hypothetical. It represents recognition of a real employee cost.

Effect of Labour Code Changes

This becomes even more relevant in the context of the labour code implementation. The one-time impact recognised during the year is not an amount created at management’s discretion, nor is it a prudential reserve. It arises because the legal framework governing employee benefits has changed, requiring companies to reassess and recognise obligations already embedded in the employment relationship.

In other words, the expense does not arise because the company chose to create a provision. It arises because the law altered the measurement of an existing obligation.

That is why excluding the amount merely because it relates to past service may not reflect the commercial reality of the transaction.

Section 198 Perspective

Section 198 permits deduction of “usual working charges” while arriving at net profits. Employee benefit costs, including gratuity and leave encashment, are part of the normal operating expenses of a business. The section does not distinguish between current service cost and past service cost, nor does it suggest that an expense should be ignored simply because it is recognised in one year due to a statutory change.

The trigger for recognition is also important. Although the underlying service may have been rendered over earlier years, the impact crystallises in the current year because of the implementation of the new law. The charge recognised in the books is therefore not a prior-period adjustment arising from error or omission, but a current-year recognition of an enhanced statutory obligation.

If a company is required during the year to recognise an increased employee benefit obligation because of a change in law, that expense assumes the character of an actual business charge incurred in that year, even if part of the underlying service relates to earlier periods.

Practical View

Viewed in this light, excluding such expense from Section 198 computation merely because it relates to past service may create an artificial divide between accounting recognition and legal obligation. More importantly, it would treat a genuine employee welfare cost as if it were a notional or contingent provision, which does not sit well with the nature of gratuity and leave encashment liabilities.

The better view, therefore, is that the one-time impact arising from the implementation of the labour codes should be allowable while computing net profits under Section 198, even where a substantial portion of the amount relates to past service periods as the expense represents a real statutory employee cost recognised pursuant to a change in law and forms part of the ordinary working charges of the company, rather than a hypothetical or contingent adjustment.

The discussion, therefore, is not merely about recognising an employee benefit expense, but about understanding how a statutory change in one area of law can influence outcomes under another. Companies would therefore be well advised to consider these implications while assessing the impact of the new labour code regime.

Since both managerial remuneration and CSR expenditure are determined on the basis of net profits computed under Section 198 of the Companies Act, 2013, any increase in employee benefit costs arising from the implementation of the labour codes would ordinarily have a corresponding impact on these computations. As a result, the one-time impact of the labour code changes is likely to reduce both the ceiling available for managerial remuneration and the amount required to be spent towards CSR.

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Wide Powers of the Tribunal

Section 241-242 of the Companies Act, 2013 gives the National Company Law Tribunal wide powers to provide reliefs in oppression and mismanagement matters. The provision is not confined to granting only the specific reliefs expressly listed in 241-242. Clause (m) of section 242(2) further expands the Tribunal’s scope by enabling it to provide for “any other matter” which, in its opinion, is just and equitable.

In addition to the statutory powers under Section 242, Rule 11 of the NCLT Rules, 2016 preserves the Tribunal’s inherent power to issue appropriate directions where necessary to meet the ends of justice or prevent abuse of process.

This language often gives parties the impression that Section 242 can operate as a complete remedial solution whenever a company is already before the Tribunal.

Although Sections 241-242 and Rule 11 reflect the Tribunal’s wide remedial jurisdiction, the relief sought cannot be viewed in isolation from the statutory framework governing that relief. For instance, when the relief concerns redemption of preference shares, the discussion must necessarily turn to Section 55, which sets out the conditions for such redemption.

Permissible Sources for Preference Share Redemption

Section 55 of the Companies Act, 2013 deals with the issue and redemption of preference shares. Its purpose is not merely to prescribe a redemption timeline, but also to protect the company’s capital structure.

Section 55(2) permits redemption only through recognised sources. Preference shares may be redeemed either out of profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made specifically for the purpose of redemption. Where redemption is made out of profits, an amount equal to the nominal value of the shares redeemed is required to be transferred to the Capital Redemption Reserve, thereby preserving the capital base of the company.

Status of Preference Shareholders when the preference shares are due for redemption

Preference share capital continues to form part of the company’s share capital until it is redeemed in accordance with law. Therefore, the maturity of preference shares may create an obligation on the company to redeem, but it does not by itself convert that obligation into an immediate debt payable from any available funds.

In Lalchand Surana v. Hyderabad Vanaspathy[1], the Court observed that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a creditor. This is because such shares can be redeemed only out of profits which would otherwise be available for dividend, or by a fresh issue of shares, which is a limitation not applicable to an ordinary creditor.

The Supreme Court, in EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited[2], also clarified that holders of cumulative redeemable preference shares are investors and not creditors, more specifically not financial creditors, for the purpose of initiating insolvency proceedings under Section 7 of the IBC, since non-redemption of such shares does not qualify as a default under the Code.

This distinction becomes relevant when a holder of matured preference shares seeks immediate payment. Since the holder continues to remain a shareholder and not a creditor, the claim cannot be enforced like an ordinary debt claim from any available fund.

When Wide Powers meet a specific mechanism

Sections 241-242 and Rule 11 may enable the Tribunal to provide reliefs in appropriate cases, but they cannot be exercised in a manner that defeats an express statutory requirement by invoking just and equitable grounds.

In Haridas Krishnan Kutty v. Jatayupara Tourism Private Limited and Others[3], the preference shareholder sought redemption of his matured redeemable preference shares under Sections 241-242 proceedings. His case was that the shares had reached the redemption date, the company was under the supervision of an NCLT-appointed Administrator, and funds were available in a Tribunal-controlled escrow/common pool account. The preference shareholder therefore sought a direction for redemption by invoking the Tribunal’s wide powers, including its power to grant just and equitable relief.

The company, the Administrator and certain other respondents opposed the relief. They argued that the company had no distributable profits. Further, redemption through fresh issue proceeds was also not feasible because subsisting status quo orders restrained alteration of the company’s share capital. The escrow funds also could not be treated as profits of that company.

The Tribunal accepted that the shares had matured, but concluded that the wide powers under Sections 241-242 and the inherent powers under Rule 11 cannot be used to bypass or act contrary to express statutory provisions. Accordingly, it refused redemption in the present proceedings, while leaving the Applicant to pursue remedies in accordance with Section 55 and other applicable provisions.

Conclusion

Where the Act provides a dedicated mechanism for a subject, the Tribunal cannot use its powers to achieve indirectly what the statute does not permit directly. In the context of preference share redemption, Section 55 prescribes the permitted sources and manner of redemption. Therefore, even where the redemption date has arrived, a direction for redemption cannot be issued under Sections 241-242 or Rule 11 if it would contravene Section 55.

[1] Lalchand Surana v Hyderabad Vanaspathy Ltd (1990) 68 Comp Cas 415 (AP).

[2] EPC Constructions India Limited (Through its Liquidator) v. Matix Fertilizers and Chemicals Limited 2025 SCC OnLine SC 2293; [2025] 189 CLA 81.

[3] Haridas Krishnan Kutty v. Jatayupara Tourism Pvt. Ltd. and Ors., (2026) ibclaw.in 1474 NCLT

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