For most listed companies in India, managing unpublished price-sensitive information (UPSI) about their own securities has become part of standard governance practice. Codes of conduct, designated persons, trading windows and digital databases are now established features of the compliance framework.

A related question, which deserves greater board attention, is less consistently addressed: what happens when the business receives commercially sensitive information about other listed companies through its ordinary customer, supplier and partner relationships?

How this information enters:

Consider how a business operates. A procurement team negotiates a significant contract with a listed EPC company, and in the course of that discussion, the other party’s representatives share information about its order book, capacity or financial position. A strategy team evaluating a joint venture receives detailed commercial information about a potential listed partner. A senior relationship manager is told by a listed customer about a material change in its business plans.

To the people in these conversations, this is normal business activity. Some of the information exchanged may, in certain circumstances, be price-sensitive in the regulatory sense. The employees involved may not recognise it as such. The organisation’s existing PIT framework may not have been designed with this type of information in mind.

Why this is a leadership issue, not only a secretarial one:

The traditional PIT framework has understandably focused on protecting the company’s own UPSI from misuse. The next governance question is how sensitive information moves across the wider business ecosystem. This is not a question that begins and ends with the secretarial function.

The Company Secretary is well placed to bring this issue onto the governance agenda — as the bridge between management and the board, and as the facilitator of a broader conversation. But effective governance around third-party information flows will involve management, sales, procurement, strategy, legal, technology and risk functions working together.

This reflects a broader principle in how information governance is evolving: good governance is not about being the most restrictive. It is about ensuring that the right controls apply to the right information at the right time.

What the regulatory architecture suggests:

The legal framework provides useful context, though precise application requires expert advice in specific circumstances. A decision of the Securities Appellate Tribunal has established, as a matter of principle, that information sensitivity is not determined by organisational affiliation — the source of UPSI and the company whose securities are traded need not be the same entity as the insider’s employer. Regulation 9(2) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 covers persons required to handle UPSI in the course of business operations. Regulation 9A addresses internal controls under the PIT framework, with oversight obligations on the CEO/MD and audit committee. The application of these provisions to third-party UPSI received through ordinary commercial activity has not been definitively settled, and specific legal advice is recommended.

From a governance standpoint, boards need not wait for regulatory certainty before examining whether their existing frameworks reflect how information actually moves through the business.

What proportionate governance looks like:

Proportionate information governance starts with understanding where the exposure actually sits — not with a new compliance layer. The question is where third-party UPSI can realistically enter the organisation, which functions are most likely to encounter it, and whether existing controls account for those flows.

A useful starting point is to map exposure rather than to assume it is covered by existing frameworks. Business relationships that involve listed counterparties — as customers, suppliers, project partners or strategic targets — may be more extensive than the existing PIT framework was designed to address.

Three actions for management are worth prioritising: mapping realistically where third-party UPSI can enter; identifying the functions most likely to encounter it; and testing whether existing controls address those flows.

The institutional question:

The deeper question is one of institutional trust. Can a listed company be trusted with sensitive information that comes to it through the normal conduct of business? That is increasingly a governance, culture and business-discipline question — and it belongs on the board’s agenda.

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The post Third-Party UPSI and Information Governance first appeared on MMJC.

Why boards should treat third-party UPSI as an information-governance issue — not merely an insider-trading control.

1. The blind spot

Listed companies have made considerable progress in managing unpublished price-sensitive information (UPSI) relating to their own securities. Codes of conduct, designated persons, trading windows and structured digital databases are now established governance features for most. But there is a second information-governance question that deserves the board’s attention, and it is less consistently examined:

What market-sensitive information about other listed companies enters your organisation through ordinary business activity — and how does your existing framework address it?

Consider a few unremarkable situations. A procurement team negotiates a large contract with a listed EPC company and learns, in the course of that discussion, material information about its order pipeline. A business development team evaluating a joint venture receives commercially sensitive information about a potential listed partner’s financial position. A key-account manager is told by a listed customer about a significant change in its strategic plans.

For the people in those conversations, this is the ordinary texture of business. Some of the information exchanged may, in certain circumstances, be price-sensitive in the regulatory sense. The people receiving it may not recognise it as such.

The question for governance is not whether any breach has occurred. It is whether the organisation has thought clearly about where this kind of information enters, who encounters it, and whether its existing frameworks account for that reality.

2. Why leadership should care:

This is not a question for the secretarial function alone. It arises through the business — procurement, sales, strategy, project management, key relationships — and the people best positioned to understand it are often in functions that sit at some distance from the traditional PIT compliance framework.

Confidential information also does not move only through formal documents. It moves through meetings, conversations, emails, presentations, shared platforms and informal exchanges. A policy response alone is therefore unlikely to be sufficient. The question is whether governance has kept pace with how businesses actually operate.

There is a useful way to frame this for the board. The traditional PIT framework has understandably focused on protecting the company’s own UPSI. The next governance question is how sensitive information moves across the wider business ecosystem — and what responsibilities flow from operating in that ecosystem.

This is not a new category of regulatory risk created by recent enforcement. It is an existing governance question that has not always been examined in the context of third-party information.

Good governance is not about being the most restrictive. It is about the right control around the right information at the right time.

3. What the regulatory architecture tells us:

The legal and regulatory framework provides context for this governance question, though the precise application in specific circumstances requires expert advice.

SEBI’s enforcement has established a foundational principle in one relevant decision: the source of UPSI and the company whose securities are traded need not be the same as the insider’s own organisation. In V.K. Kaul v. SEBI (Appeal No. 55 of 2012, SAT, October 2012), the matter involved a person who had access to UPSI concerning one listed company and traded in that company’s securities, though his primary association was with another company.¹ This establishes, as a matter of principle, that information sensitivity is not determined by organisational affiliation.

SEBI’s proceedings involving ICSA (India) Limited’s transactions with state electricity boards, and the SAT’s subsequent consideration of the matter in G. Bala Reddy & Others v. SEBI (July 2019), illustrated that commercial and contractual processes can generate price-sensitive information before any formal corporate announcement.² This is relevant context for understanding how UPSI can arise through ordinary business activity.

Regulation 9(2) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 covers “every other person who is required to handle UPSI in the course of business operations.” Whether and how this provision applies to a listed company’s situation when it receives third-party UPSI through ordinary commercial activity is a question that has not been definitively settled, and specific legal advice is recommended in context.

Regulation 9A requires the CEO or managing director to put adequate and effective internal controls in place and requires the audit committee to review and verify that those controls are adequate and operating effectively. The scope of this obligation in relation to third-party UPSI should similarly be reviewed in context.

From a governance standpoint, the more important question is whether existing frameworks reflect the way information actually moves through the business. Boards need not wait for regulatory clarity before examining whether their information flows are well-governed.

We note, based on our current research, that we have not identified a SEBI enforcement order specifically holding a non-intermediary commercial company liable for failing to establish a framework for third-party UPSI received in the ordinary course of business. This does not constitute legal advice, and the regulatory position continues to evolve.

A recent SEBI enforcement matter – SEBI interim order in the matter of IEX dt: October 15, 2025 – illustrates the regulator’s attention to information-based cases arising from commercial and regulatory activity. The governance-minded organisation treats this not as an enforcement alert but as a prompt to examine its own information architecture.

4. Five questions for the board:

2. Is our framework built for how information actually moves?

Information does not travel only through formal channels. It moves through informal conversations, messaging platforms, shared documents and verbal briefings. A framework that addresses policy language alone is unlikely to account for these flows. The question for the board is whether confidentiality is a feature of the operating model — in how workflows are designed, how systems are configured, how data rooms and access controls operate — rather than only a clause in an agreement.

BOARD QUESTION: Does the way our business actually handles information reflect the sensitivity of what it receives?

3. Are we prepared to enforce our framework consistently?

A governance framework has value only if the organisation is willing to apply it consistently — including in situations where the person involved is commercially important. This is not merely a legal or compliance question; it is a question of institutional culture. It is also a practical question: management should consider the enforcement implications of the framework before, not after, the first difficult situation arises.

BOARD QUESTION: If our framework were tested against a senior or high-performing member of the team, would we apply it?

4.  Are we proportionate rather than performative?

The objective is governance that enables confident business activity, not governance that creates friction for its own sake. Proportionality requires calibrating the level of control to the realistic sensitivity of the information — a routine supplier discussion and a transaction involving a listed counterparty are not the same. Frameworks that are formally comprehensive but practically unwieldy tend not to function as intended.

BOARD QUESTION: Does our framework actually work in the way business is conducted — or would it break down under normal operating pressure?

5. Does our responsibility extend to our business partners?

The information chain does not end at the boundary of the listed company. A smaller supplier, contractor or JV partner may receive commercially sensitive information in the course of a business relationship yet have no established framework for handling it. There is a governance dimension to consider here: not imposing compliance requirements on every counterparty, but ensuring that sensitive information shared with third parties is accompanied by appropriate confidentiality discipline

BOARD QUESTION: Do our business partners understand the sensitivity of information they receive from us — and do our agreements and practices reflect that?

5. What good information governance looks like: Proportionate governance in this area does not require a separate compliance programme or a new category of designated persons. It requires an institution to examine how information moves through its business and whether its architecture reflects that reality. A high-level framework might proceed as follows:

• IDENTIFY  Where can third-party UPSI enter the organisation?

Map the business relationships, workflows and processes through which sensitive information about other listed entities could realistically enter — customer relationships, supplier contracts, strategy discussions, M&A, project negotiations, JV conversations. Avoid limiting this exercise to job titles or existing designated-person categories.

• MAP  Which roles and processes are realistically exposed?

Identify the functions, teams and individual roles that are most likely to encounter this information in the ordinary course of their work. This is a business question as much as a governance question, and it benefits from involving the relevant business heads rather than only the governance function.

• CLASSIFY AND ESCALATE  What happens when potentially sensitive information enters?

Establish a clear pathway for individuals who encounter information that may be sensitive: how to recognise it, who to inform, and what restricted treatment, if any, should follow. This need not be complex, but it must be practical and understood.

• CONTROL  What proportionate people, process and technology controls apply?

Controls may include information classification, access management, restricted data rooms, confidentiality protocols, audit trails and, where legally relevant, trading restrictions. The appropriate level of control should be calibrated to the realistic sensitivity of the information and the nature of the relationship.

• ASSURE  Who checks that the framework actually functions?

Periodic review by management and oversight by the audit committee or board committee creates institutional accountability. The question is not only whether the framework exists, but whether it operates as intended.

6. Three actions for management:

1. Map where third-party UPSI can realistically enter: Commission a structured conversation with key business heads — in procurement, sales, strategy, projects and key-account management — about the listed entities they interact with and the nature of the information they receive. This does not require a legal exercise; it requires business self-awareness.
2. Identify the functions most likely to encounter it: Work beyond the existing designated-persons framework to understand which people in the organisation are regularly in a position to receive sensitive information about other listed entities. These individuals may not have been included in standard PIT training or awareness.
3. Test whether existing controls address the real information flow: Review the organisation’s current policies, access controls, workflows and training programmes and assess whether they account for information received from, or about, listed counterparties. Where gaps exist, design proportionate responses.

7. From PIT compliance to information governance:

The issue raised in this note ultimately reflects a broader evolution in how listed companies should think about information. The traditional insider-trading conversation has been framed around protecting the company’s own UPSI from misuse. That remains important.

But businesses do not operate in isolation. They operate through ecosystems of customers, suppliers, contractors, JV partners and counterparties. Information moves across those relationships in both directions. Some of that information will, in certain circumstances, meet the definition of UPSI with respect to other listed entities. The governance question is whether the organisation has considered those flows and whether its architecture is proportionate to them.

This is also an opportunity to elevate the Company Secretary’s role. Historically, PIT governance has been largely a secretarial function. A mature information-governance framework requires the Company Secretary to facilitate a conversation that draws in management, sales, procurement, legal, technology and risk — as the architect of a broader governance agenda, not only as the administrator of a compliance requirement.

8. The institutional question:

A governance framework that addresses only the company’s own UPSI is necessary, but not sufficient for a listed company operating through the full complexity of a modern business ecosystem.

The deeper question is one of institutional trust: can we be trusted with sensitive information that comes to us simply because of the business we conduct with others? This is a question of business culture and leadership discipline — not primarily a regulatory one.

The organisations that examine this question calmly and early — that have designed proportionate systems, built appropriate awareness, and developed the discipline to apply them — are the ones whose governance is genuinely fit for how business operates. For a listed company, that is governance, not compliance.

NOTES

1  V.K. Kaul v. SEBI, Appeal No. 55 of 2012, SAT, order dated 8 October 2012. The case involved trading in Orchid Chemicals & Pharmaceuticals Ltd shares on information about a proposed acquisition by a Ranbaxy subsidiary. The principle is relevant because the UPSI related to the traded company’s securities, though the individual’s association was with another listed company.

2  ICSA (India) Ltd / G. Bala Reddy & Others v. SEBI, SAT, decided 12 July 2019. SEBI’s original proceedings concerned UPSI arising from work orders involving state electricity boards, examining when information from a tender process became price-sensitive.

The post When Other Companies’ UPSI Enters Your Business first appeared on MMJC.

The recent decision of the Securities Appellate Tribunal (“SAT”) in Hindustan Foods Limited v. BSE Limited & Anr. requires us to examine the expectations from settlement proceedings more carefully.

The case raises an interesting question: if proceedings relating to a regulatory non-compliance have already been settled with SEBI, can the stock exchange still impose a monetary consequence for the same non-compliance?

Hindustan Foods had approached SEBI under the settlement mechanism in relation to, inter alia, non-compliance with Regulation 17(1)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). The company paid a settlement amount of ₹24.32 lakh and SEBI passed a settlement order on October 10, 2023. BSE thereafter imposed a fine of ₹52.21 lakh for violation of the very same Regulation 17(1)(b). SAT upheld the action of BSE.

The decision therefore raises a larger question: what exactly gets settled when a matter is settled with SEBI?

Parallel consequences under regulation 98?

SAT relied on Regulation 98 of the LODR Regulations. It provides that a listed entity contravening the LODR Regulations shall, “in addition to liability for action in terms of the securities laws,” be liable for action by the respective stock exchange. Such action may include imposition of fines, suspension of trading, freezing of promoter/promoter group holdings and such other action as may be specified by SEBI.

The words “in addition to” are important. They indicate that action under securities laws and action by the stock exchange are not necessarily alternatives.

The term “securities laws” is itself widely defined under Regulation 2(1)(zf) of the LODR Regulations and includes the SEBI Act, the Securities Contracts (Regulation) Act, the Depositories Act, rules and regulations made thereunder, general or special orders, guidelines and circulars issued by SEBI, and provisions of the Companies Act, 2013 or previous company law and subordinate legislation administered by SEBI.

The regulatory structure therefore contemplates two channels – action under the securities laws and action by the stock exchange under the framework prescribed by SEBI.

The SEBI Circular dated January 22, 2020, follows the same approach. Clause 7 provides that action under the SOP is without prejudice to SEBI’s power to take action under the securities laws. SAT specifically relied upon this provision.

Seen in this context, the result in Hindustan Foods follows from the language of the regulatory framework itself.

What, then, does a SEBI settlement settle?

This is perhaps the more important question from a business perspective.

Section 15JB of the SEBI Act deals with the settlement of administrative and civil proceedings. It enables settlement of proceedings that have been initiated or may be initiated in respect of specified alleged defaults.

A settlement is not the same as an adjudication followed by imposition of a monetary penalty. Under the SEBI (Settlement Proceedings) Regulations, 2018, the amount paid pursuant to the settlement is a settlement amount, and the proceedings are disposed of on the basis of the approved settlement terms.

It is to be noted that the settlement order of Hindustan Foods itself expressly stated that it was without prejudice to action, if any, that may be initiated by recognised stock exchanges under the January 22, 2020 Circular.

Is this double punishment?

Economically, the concern is obvious. One underlying Regulation 17(1)(b) default resulted in a Rs. 24.32 lakh settlement payment to SEBI and a further Rs. 52.21 lakh fine payable to BSE.

Legally, however, describing this as two penalties is not entirely accurate.

The amount paid to SEBI was a settlement amount as per Settlement Regulations 2018, not a penalty imposed after adjudication. The fine levied by BSE, on the other hand, was a fine imposed pursuant to the SEBI circular dated 22 January 2020.

More importantly, there is no general principle of civil or regulatory law that the same factual conduct can give rise to only one monetary consequence. The relevant question is whether the governing law permits cumulative action.

Here, Regulation 98 expressly does so.

SAT also relied upon its earlier decision in Alien Developers Private Limited, where it observed that regulatory compliances vis-à-vis SEBI and BSE operate in “different spheres”. Accordingly, the pleas of res judicata and double jeopardy were rejected.

The decision should, however, not be read to mean that multiple monetary consequences can be imposed merely by describing them differently. Each action must independently derive authority from the applicable law. In Hindustan Foods, that authority arose from Regulation 98, the SOP Circular and the express reservation in the settlement order.

The unresolved question is proportionality

While SAT has clarified that both actions can legally co-exist, a broader policy issue remains.

The stock exchange is not operating in an unrelated regulatory framework. Its SOP powers arise from the LODR Regulations and a mechanism prescribed by SEBI itself. SEBI enforcement and exchange enforcement may operate in separate legal spheres, but for the listed entity they ultimately form part of the same regulatory exposure arising from the same compliance failure.

This raises a legitimate question: should foreseeable stock exchange fines be considered while determining settlement terms with SEBI, so that the overall monetary consequence remains proportionate?

The Hindustan Foods decision does not answer this question. It only confirms that, under the present framework, settlement with SEBI does not automatically eliminate exchange-level consequences.

Conclusion

Before deciding to settle a matter with SEBI, a listed entity should examine what exactly is being settled and what regulatory exposure may survive the settlement.

Where the settlement order preserves the right of recognised stock exchanges to take action, the possibility of an SOP fine should therefore form part of the entity’s assessment while evaluating the settlement.

Now, whether Hindustan Foods travels further to the Supreme Court remains to be seen.

Author: Ms. Radhika Varade [Deputy Manager (R&D Department)]

The post Settlement with SEBI AND Fine by the Exchange: Co-exists? first appeared on MMJC.

Introduction

The investment manager (“IM”) of ABC InvIT proposes to appoint a statutory auditor for the InvIT. The proposed auditor has requested a tenure of three years. The IM, however, is of the view that Regulation 10(6) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) requires the auditor to be appointed for a five-year tenure

The question is whether Regulation 10(6) prescribes a maximum tenure, within which a shorter term may be fixed, or mandates the tenure specified in the provision. This article examines that question.

Regulatory framework

The provisions governing the appointment and tenure of an InvIT’s auditor are contained in Regulations 10(6) and 10(6A) of the InvIT Regulations. Before the 2023 amendment, Regulation 10(6) permitted the auditor to be appointed for a period not more then five consecutive years and to be reappointed for another period of five consecutive years, subject to the applicable conditions. The expression “not more then” indicated a ceiling. On that language, a shorter initial tenure was arguably permissible

The 2023 amendment

On 14 February 2023, Regulation 10(6) was substituted, with effect from 1 April 2023. The amended provision states that the auditor shall hold office from the conclusion of the annual meeting at which the auditor is appointed until the conclusion of the sixth annual meeting. Regulation 10(6A) was also inserted to govern reappointment and the maximum number of consecutive terms

Effect of the Amended Language

Following the amendment, Regulation 10(6) no longer uses language merely prescribing a maximum period. It fixes both the commencement and the expiry of the auditor’s term: from the conclusion of the annual meeting at which the appointment is made to the conclusion of the sixth annual meeting. The amended language therefore prescribes the tenure itself, rather than merely setting its outer limit.

Further the intentional removal of words “not more than” makes it clear that the term of 5 years is a fix term and cannot be less then that. Additionally, if we refer the language of reg 10(6), it is seen that the provision uses the word “shall hold office” while specifying the term. As per principles of interpretation of statutes, the use of word “shall” in the provision of a statute, indicates that the action followed by the word “shall” is mandatory. That means, if the provision states that auditor should be appointed for 5 years, then appointment has to be made for 5 years. The entity making the appointment does not have a choice with respect to the term in such case.

This interpretation is consistent with SEBI’s stated objective behind the amendment. In its December 2022 Board Meeting release, SEBI described the proposal as one intended to align the tenure of auditors of REITs and InvITs with that under Companies Act 2013 . The structure of amended Regulation 10(6) is also broadly aligned with Section 139(1) of the Companies Act, 2013, under which an auditor ordinarily holds office from the conclusion of the appointing annual general meeting until the conclusion of the sixth annual general meeting. The Companies Act framework therefore provides useful corroborative context, although the conclusion under the InvIT Regulations follows sprimarily from the language of Regulation 10(6) itself.

Conclusion.

The earlier provision allowed an auditor to be appointed for a period of up to five years. After the 2023 amendment, Regulation 10(6) prescribes a five-year term instead of merely fixing a maximum limit. So, to answer the question we saw at the beginning, the IM’s view is correct, and the auditor cannot be appointed at the outset for only three years. However, the auditor may leave office earlier due to resignation, removal, disqualification or any other legally permitted reason.

The article is written by

Rutuja Umadikar – Deputy Manager

This article is published on taxguru link below.

https://taxguru.in/sebi/invit-auditor-tenure-years-shorter-term.html

The post InvIT Auditor Tenure: Five Years or a Shorter Term? first appeared on MMJC.

Background

The concept of “material subsidiary” under the SEBI Listing Obligations and Disclosure Requirements Regulations, 2015 (“SEBI LODR”) is an important group governance requirement for listed entities.  A practical issue arises where:

1. the subsidiaries have negative net worth or
2. where the consolidated net worth of the listed entity and its subsidiaries itself is negative.

In such cases, the question is whether the subsidiary can still be identified as a material subsidiary and whether the turnover test can be applied independently?

Relevant provision under SEBI LODR

Regulation 16(1)(c) of SEBI LODR defines “material subsidiary” to mean a subsidiary whose turnover OR net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

The definition therefore contains two independent parameters:

1. Turnover test; OR
2. Net worth test.

The use of the word “OR” is significant. It indicates that a subsidiary may qualify as a material subsidiary if it satisfies either the turnover test or the net worth test.

Further, Regulation 16(1)(c) also requires the listed entity to formulate a policy for determining material subsidiary. Therefore, the regulation gives a statutory threshold but also expects the listed entity to have a documented policy for identification of material subsidiary in case thresholds are not relevant to identify material subsidiary. The following four questions consequently arise.

Q1. If the net worth figure is negative as specified under regulation 16(1)(c ) of SEBI LODR, what shall be the criteria for determination of material subsidiary?

Where the networth of the subsidiary is negative but net worth of consolidated entity is positive then, the negative net worth of the subsidiary is  not comparable with a positive consolidated net worth. The net-worth test would, therefore, not be satisfied. In this case, the turnover test must be applied and ascertained whether subsidiary would be considered as material subsidiary or not? However, a subsidiary with a substantial negative net worth may create greater risk for the listed entity than a subsidiary with a positive net worth.   

Now looking at a situation where the consolidated net worth of the listed entity and its subsidiaries is negative or zero. In this situation ten per cent of a negative consolidated net worth would itself be negative. A mechanical comparison may consequently produce anomalous results for example, a subsidiary with a small positive net worth may technically “exceed” the negative threshold, while a subsidiary having a substantial negative net worth may not.

In order to tackle such situations, the material-subsidiary policy may, therefore, adopt a stricter criterion based on the absolute value of negative net worth, accumulated losses, guarantees, funding exposure or similar factors. Such an additional test would expand governance oversight rather than dilute the LODR threshold.

Q2. Can the listed entity follow only one of the two parameters?

No. The word “OR” makes turnover / net worth alternative and independently sufficient tests. It does not give the listed entity an option to select whichever parameter it prefers. Accordingly, both materiality criteria needs to be checked with turnover and net worth respectively. It may happen that in a particular situation one of the criteria for determining materiality is not relevant. In such scenario that criteria may not be relevant and hence policy for determining materiality of subsidiaries would come into play.

Where one parameter becomes arithmetically distorted because the denominator is zero or negative, the other parameter continues to operate independently, but the difficulty concerning the affected parameter must be addressed through a reasoned and documented process that may be provided under the policy for determining of material subsidiary

Q3. Why is a policy required for determination of material subsidiary when SEBI LODR already prescribe the criteria expressly for determination of material subsidiary?

Reg. 30(4) of SEBI LODR prescribes criteria for determination of materiality for the purpose of disclosure of events or information to stock exchange. It provides for three criteria for determination of materiality for the purpose of disclosure of events or information as per Sch III, Para B of SEBI LODR viz. 2% of net worth, 2% of turnover or 5% avg of absolute value of profit after tax for last three financial years. In addition to this reg. 30(4) provides for determination of other criteria for determination of material events or information that may form part of the policy on determination of materiality. Further Reg 23(1) of SEBI LODR provides for framing of policy on determination of material related party transactions. Reg. 23 provides that transactions with related party would be material once they cross threshold specified under Sch XIII of LODR.

It can be seen that when it comes to determination of materiality, SEBI has in LODR not only prescribed the threshold for determining materiality but has empowered the listed entity to frame policy.

It is seen that when it comes to assessment of materiality, SEBI has provided for framing policy for determination of materiality in addition to prescribing threshold for ascertainment of materiality, in order to ensure that the determination of materiality is always holistic in nature. Policy for determining materiality of subsidiary or otherwise is always prescribed in order to further the purpose of identification of material subsidiary.

Hence the policy requirement is not redundant but has to be applied for where the identification of subsidiary as material subsidiary only on the basis of turnover or net worth would not be correct in the context of the compliances that are made applicable to material subsidiary under LODR.

The policy for determination of material subsidiary may address matters such as:

• the financial statements and accounting figures to be used;
• treatment of foreign, step-down and newly acquired subsidiaries;
• treatment of negative or zero net worth;

• responsibility for preparing and verifying the calculations;
• monitoring of subsidiaries approaching the threshold;
• treatment of mergers, demergers or changes in the group structure;
• cover subsidiaries having significant borrowings, guarantees or funding exposure;
• identify strategically or operationally critical subsidiaries; or
• additional qualitative or quantitative criteria requiring enhanced oversight.

Q4. What is the role of the board in identifying and overseeing material subsidiaries?

Its role is to ensure that the criteria for determination of material subsidiary is applied across all subsidiaries uniformly and check whether it is relevant to determine subsidiary as per the criteria laid down in SEBI LODR.

Where it is not relevant to identify material subsidiary as per the criteria laid down in SEBI LODR then ensuring that the policy for determination of material subsidiary has all the relevant criteria for same.

The board cannot override the statutory formula merely because it considers a subsidiary to be immaterial.

The board should ensure that:

1. The policy for identification of material subsidiary is appropriately framed, approved and periodically reviewed and identification of material subsidiary is done accordingly;

The board’s oversight is not confined only to material subsidiaries. Regulations 24(2), 24(3) and 24(4) refer to unlisted subsidiaries, rather than only unlisted material subsidiaries. Consequently, the audit committee must review the financial statements and investments of unlisted subsidiaries, while their board minutes and significant transactions must be brought before the board of the listed entity.

Conclusion

A holistic assessment of materiality does not permit the listed entity to depart from the statutory thresholds. It requires the company to apply both prescribed parameters, recognize the limitations of a purely arithmetic exercise and supplement the statutory tests with stricter and consistently applied policy criteria. The policy may expand the universe of subsidiaries receiving enhanced oversight, but it cannot narrow the scope prescribed by the LODR Regulations. The board must ultimately ensure that the identification process is annual, reasoned, documented and aligned with the governance consequences flowing from Regulations 24, 24A, identification of designated persons under Reg. 9 of PIT and 30. It is advisable for the listed entity to initiate tracking for material subsidiary classification as soon as a subsidiary’s turnover or net worth attains 8% to 9% of the consolidated turnover or net worth of the listed entity.

The article is written by

Vallabh Joshi  – Associate Director

This article is published on taxguru link below.

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000028925/identification-of-material-subsidiary-where-the-consolidated-net-worth-of-listed-entity-and-its-subsidiaries-is-negative-opinion

The post Identification of Material Subsidiary where Subsidiaries / Consolidated Net Worth is Negative first appeared on MMJC.

Background

The Companies Act, 2013 (herein referred to as “the Act/Act”) has introduced several provisions regulating borrowings and private placements by companies. Subsequently, the Ministry of Corporate Affairs (MCA) granted various exemptions to private companies through notifications. One such exemption has given rise to an apparent inconsistency when read alongside the provisions governing private placement of Non-Convertible Debentures (NCDs).

This article examines the chronology of the relevant provisions and analyses whether a private company can simultaneously claim the exemption from passing a special resolution under Section 180(1)(c) and the exemption under Section 42 for issuance of NCDs.

Chronology of Relevant Provisions

• Notification of Section 180

Section 180 of the Companies Act, 2013 was notified with effect from 12 September 2013 which provides certain conditions for borrowings for any COMPANY registered under the Act :

“the Board of Directors shall exercise the power to borrow money, where the money to be borrowed together with the money already borrowed exceeds the aggregate of the company’s paid-up share capital, free reserves and securities premium, only with the consent of the members by way of a special resolution”

• MCA Notification dated 5 June 2015

The Ministry of Corporate Affairs, vide Notification G.S.R. 464(E) dated 5 June 2015, granted exemptions to PRIVATE companies out of which One of the significant exemptions provides that:

“Section 180 shall not apply to a PRIVATE company”

Accordingly, a private company is no longer required to obtain shareholders’ approval by way of a special resolution under Section 180(1)(c), irrespective of the amount of its borrowings.

• Notification and Amendment of Section 42

Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, (herein refereed to as “Rule 14” ) to Private Placement was also brought into force on 12 September 2013. Thereafter, the provision underwent substantial amendments through the Companies (Amendment) Act, 2017, effective 7 August 2018 in which specific exemption is given for those COMPANIES who are issuing NCD’s which exceeds the limits of Section 180 (1) (c ) to not comply with sub-reg 14(1) i.e. passing of special resolution for issuance of NCD’s via private placement in case a prior approval under section 180 (1) (c) exists. The extract of the second and third proviso to rule 14 has been provided below:

“Provided further that this sub-rule shall not apply in case of offer or invitation for. non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant Board resolution under clause (c) of subsection (3) of section 179 would be adequate”

“Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year”

A tabular representation  has been given below to simply the anomaly:

The Apparent Anomaly Since Section 180 does not apply to a private company, the question arises whether a private company can issue NCDs of any quantum solely via a Board resolution under Section 179(3)(c), or whether it must still pass a special resolution under Rule 14.

Two Schools of Thought

School 1: The Blanket Exemption Approach Section 180 is not applicable to a private limited company by virtue of the MCA exemption notification Consequently, pursuant to the second proviso to Rule 14(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules), a Board resolution passed under Section 179(3)(c) constitutes sufficient compliance for the issuance of Non-Convertible Debentures (NCDs) via private placement under Section 42 of the Companies Act, 2013.

Thus, requiring a private company to pass a special resolution under Section 42 for every offer of non-convertible debentures (NCDs) on the premise that Section 180 does not apply indirectly reintroduces a compliance burden from which the Ministry of Corporate Affairs (MCA) expressly exempted private companies via its official notification.”

Accordingly, under the first approach the interpretation can be that since there is no limit for borrowings under section 180 for private limited companies, a board resolution passed under section 179 shall be a sufficient compliance under section 42 of Companies Act, 2013 and thus it can be said that the inability to satisfy this condition under Rule 14 is a consequence of a statutory exemption and not of any non-compliance and therefore private companies should not be denied the benefit intended under Rule 14 of the Act.

However, will this approach actually sever the intention of Section 42 read with Rule 14 of the Act? Will it not render the second proviso redundent?

Harmonious Interpretation: Treating Section 180(1)(c) as a Mathematical Benchmark

The exemption provided under Rule 14 for issuance of NCD’s is principally to avoid duplication of approvals taken to the shareholders of the Company and thus once the shareholders have approved the overall borrowing capacity under section 180 (1) (c ) of the Act, the issuance of non-convertible debentures ordinarily represents only the mode or instrument through which that borrowing authority is exercised via Section 42 read with Rule 14 of the Act.

Now, while analysing this from the lense of a private Company, basis to the exemption received via MCA Notification; section 180 has been exempted to private companies and thus, any amount of borrowings can be done by a private company via Board resolution under Section 179 of the Act without taking the matter to the shareholders of the Company.

Thus an alternative view may be that the exemption granted to private companies from Section 180 cannot be extended so as to dilute the independent approval requirement prescribed under Section 42 read with Rule 14. The MCA Notification dated 5 June 2015 only exempts private companies from the restrictions on the borrowing powers of the Board under Section 180. It does not expressly exempt them from the private placement framework under Section 42 or from the requirement of obtaining shareholders’ approval for an offer or invitation of non-convertible debentures.

Treating a Board resolution under Section 179(3)(c) as a substitute for a special resolution under Section 42 lacks statutory backing and risks rendering the third proviso to Rule 14(1) redundant.

Applying the rule of harmonious construction which requires apparently conflicting provisions to be interpreted in a manner that preserves the operation and purpose of each provision, the reference in Rule 14(1) to the “limit as specified in clause (c) of sub-section (1) of section 180” must be construed as a numerical benchmark (aggregate of paid-up share capital, free reserves, and securities premium) rather than a condition precedent regarding the operative applicability of Section 180 itself. This interpretation reconciles both provisions effectively: it preserves the Board’s unrestricted general borrowing power under Section 180 for private companies while retaining shareholder oversight under Section 42 read with Rule 14 whenever NCD issuances breach the statutory financial threshold.

Conclusion

The interplay between the exemption granted to private companies under the MCA Notification dated 5 June 2015 and the exemption available under Section 42 read with Rule 14 presents a genuine interpretative issue under the Companies Act, 2013.

While one line of reasoning, based on the rule of harmonious construction, suggests that a private company should not be denied the benefit of Rule 14 merely because it is statutorily exempt from Section 180, an equally plausible interpretation is that the relaxation under Rule 14 is predicated upon prior shareholder approval of the company’s borrowing capacity under Section 180(1)(c). Since a private company does not obtain such shareholder approval, the very foundation for dispensing with a separate special resolution under Section 42 may be absent.

Thus, from a legal-risk and governance perspective, obtaining a special resolution under Section 42 read with Rule 14 for the private placement of non-convertible debentures by a private company, particularly where the proposed borrowings exceed the thresholds referred to in Section 180(1)(c), appears to be the more prudent and defensible course. Such an approach mitigates potential compliance risk without materially prejudicing the company’s ability to raise funds.

The article is written by

Krishna  Shah – Senior Manager

This article is published on taxguru link below.

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000028916/issuance-of-ncds-by-private-companies-a-compliance-anomaly-under-the-companies-act-2013-opinion

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