The recent decision of the Securities Appellate Tribunal (“SAT”) in Hindustan Foods Limited v. BSE Limited & Anr.1 requires us to examine the expectations from settlement proceedings more carefully.

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 Rs. 24.32 lakh and SEBI passed a settlement order on October 10, 2023. BSE thereafter imposed a fine of Rs. 52.21 lakh for violation of the very same Regulation 17(1)(b). SAT upheld the action of BSE.

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?

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 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 outcome 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 the 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 the imposition of a monetary penalty. Under the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement 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 important to note 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 default regulation 17(1)(b) 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 under the 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 framework 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.

Therefore, it can be seen that each action must independently derive its 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.

Settlement is subject to SEBI’s discretion

It is to be noted that under the existing Settlement Regulations, 2018, a settlement application filed suo-motu by an applicant may be accepted by SEBI unless it falls under prescribed criteria where a settlement application may be rejected.

To clarify, if the application is complete and is not barred under regulation 5(1), SEBI may take it up for consideration. However, SEBI may decline to settle a matter where the alleged default has a market-wide impact, has caused loss to a large number of investors, affects market

integrity, or where other circumstances specified in the Settlement Regulations 2018 make settlement inappropriate.

Accordingly, unlike an SOP fine imposed by a stock exchange upon occurrence of a certain non-compliance, settlement with SEBI is not automatic. Whether a matter is settled remains subject to the regulatory framework and SEBI’s discretion under the Settlement Regulations.

Conclusion

Before deciding to settle a matter as per Settlement Regulations, a listed entity should examine not only what is being settled, but also 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 form part of the entity’s assessment while evaluating the settlement.

Whether Hindustan Foods will travel 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 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 Taxmann 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.

Impact of Labour Codes on listed companies

Do Listed Cos Need Separate stock exchange filing even when disclosure of same is already disclosed to stock exchange as board meeting outcome?

The implementation of the new Labour Codes has opened up an important compliance question for listed entities. The issue is not only whether the new framework changes employee cost, gratuity liability, leave encashment, wage structure or compliance processes, the more immediate question for listed entities is, where the impact due to applicability of new Labour code is material, is it sufficient to disclose the impact as a note to financial results, or should a separate disclosure also be made to the stock exchanges under Regulation 30 of the SEBI Listing Regulations?

Applicability of Labour Codes are a change in regulatory framework for all listed entities?

The four Labour Codes brought into force from 21 November 2025 consolidate and replace several earlier Labour laws. Their effect is not merely procedural. The new framework may alter how entities calculate wages, employee benefits, gratuity, leave obligations, social security contributions, contract Labour compliance and other employment-related costs. The actual impact will differ from company to company, depending on the nature of workforce, wage composition, employee mix, use of contract Labour, accounting policy and actuarial assumptions.

This is where the SEBI Listing Regulations have become relevant. Schedule III, Part A, Para B of the SEBI LODR Regulations specifically covers “effect(s) arising out of change in the regulatory framework applicable to the listed entity.” It is an express disclosure category. Therefore, where the Labour Codes create a material effect on a listed entity, the event fall within this item.

Many regulatory changes apply to an entire industry or to a large class of companies. What is relevant for Regulation 30 is not whether the law is entity specific. The relevant test is whether the regulatory change has a material effect on the listed entity. A general law can still have a specific financial or operational impact on a particular company.

When does the disclosure trigger arise?

The trigger should not be mechanically linked only to the date on which the Labour Codes came into force. The event under Para B item 7 is the “effect” arising out of the regulatory change. Therefore, the relevant point for disclosure may be when the listed entity becomes aware of the material effect. Where a company assesses a significant charge towards additional gratuity or leave obligation due to the revised wage definition, the company has reached a stage where the regulatory change has translated into a financial effect. The culmination of this assessment would be in the board meeting where the financial results would get approved.

So, if the provisioning of impact of the effect of Labour code on financial results of an entity is approved in the board meeting along with the financial results of the company for a quarter or half year or year then, it would be correct on the part of the company to disclose the impact of the effect of Labour code along with financial results as a part of the board meeting outcome under Regulation 30 of LODR.

Does every listed entity need to make a stock exchange disclosure when they are discussed in board meeting of the company along with financials?

As discussed, the disclosure obligation under Para B is based on materiality. A listed entity should first assess whether the effect of change in regulatory framework has a material impact on its financial, operations, employee cost structure, liabilities, business model or compliance burden. It may sometime happen that the change in regulatory framework is applicable across industry or sectors, in that case also material impact needs to be ascertained as the impact on listed entity in each sector or industry would vary. In case of an aviation company, an insider was held liable for insider trading when he traded in shares of an airline stock under presumption that it would be beneficial most due to low fuel prices due to falling crude oil prices globally[1].    

If a listed entity carries out an internal assessment and concludes that there is no material financial or operational impact, a separate stock exchange disclosure may not be necessary. However, the basis for this conclusion should be documented internally, preferably through assessment by one or more key managerial personnel under reg. 30(5) of LODR. It also needs to be discussed at the meeting of board of directors that the impact due to regulatory change is assessed and a noting in this regard is taken by board of directors.

On the other hand, if the impact is material, or is likely to be material, the company should evaluate disclosure under Regulation 30 read with Schedule III, Part A, Para B, item 7.

Is separate stock exchange disclosure mandatory for impact of Labour code even when the disclosure of impact of effect of Labour code is being disclosed as outcome of board meeting along with financials of the listed entity?

SEBIs in stock disclosures under regulation 30 of LODR looks at whether the disclosure gave investors a complete and fair picture.

In the Genus Power matter[2], SEBI questioned a disclosure where a large order value was announced but the revenue recognition period was allegedly not disclosed. SEBI’s concern was that investors may be misled if they see a large headline number without understanding that the revenue would be recognized over several years. The company argued that Advanced Metering Infrastructure Service Provider contracts were part of its ordinary course of business, that the standard contract period was available in public domain through government/industry documents, that the disclosure had referred to the company’s total order book, and that the revenue realization period was also discussed in the earnings call transcript filed with the stock exchanges. After considering these facts, the Adjudicating Officer gave the benefit of doubt to the company and held that the alleged violation of Regulation 4(1)(c) and Regulation 4(1)(d) of the LODR Regulations did not stand established. SEBI AO in the matter of Genus Power shows that adequacy of disclosure is fact specific. If the allegedly omitted information is already available in the public domain, has been explained through exchange-filed earnings call transcripts or any other publicly available media forum, is consistent with industry practice, and there is no evidence of misleading investors, SEBI may take a lenient view.

The principle is relevant for Labour Code disclosures as well. If a company recognizes a significant exceptional charge due to the Labour Codes, investors should not be left to guess whether the amount is one-time, recurring, actuarial, cash or non-cash, or whether further impact may follow. SEBI will examine whether investors had access to adequate, accurate and non-misleading information in the facts of the case.

SEBI and SAT have, in certain cases, recognized that information widely reported in mainstream media or otherwise available in the public domain may be “generally available” for the purpose of insider trading analysis[3].

Regulation 30 is built on the principle of equal, timely and formal dissemination through stock exchanges. Therefore, if a listed entity discusses the financial impact of Labour Codes in board meeting along with financial results, then the impact of the Labour code on financials should also be disclosed to stock exchange along with board meeting outcome and no separate disclosure is necessary.

What should the disclosure contain?

For this item, SEBI does not appear to prescribe a detailed event-wise format comparable to certain other Regulation 30 events. That does not mean a company can make a vague disclosure. The disclosure must still satisfy the broader principles of Regulation 30 and Regulation 4. It should be timely, accurate, adequate and not misleading.

A good disclosure should ideally cover the following:

1. the regulatory change, i.e. implementation of the Labour Codes;
2. the date from which the framework became effective;
3. the nature of impact, such as gratuity, compensated absences, provident fund, ESI, wage restructuring, contract Labour or other employee benefit cost;
4. the amount of impact, if quantified;
5. the financial statement line item where the impact is recognized;
6. whether the impact is one-time, recurring, exceptional or still under assessment;
7. the basis of computation, such as actuarial valuation, management estimate or auditor-reviewed assessment;
8. whether the impact is subject to further rules, clarifications or implementation guidance;
9. whether the company expects any further material impact; and
10. whether the company will update the stock exchanges if further material developments arise.

The disclosure should not merely say that “the company has assessed the impact of Labour Codes.” If the impact is material, investors should know what has changed, how much has changed, and how it affects the company’s financial position or performance.

Conclusion

So, if a listed entity has discussed impact of effect of Labour code on financials of a listed entity at the board meeting along with financial results, then it would be sufficient if the impact of the same is being disclosed as part of outcome of board meeting.

[1] SEBI AO in the matter of Spicejet Ltd dt: May 29, 2020. –

[2] https://www.sebi.gov.in/enforcement/orders/mar-2025/adjudication-order-in-the-matter-of-genus-power-infrastructures-limited_93152.html

[3] https://www.sebi.gov.in/enforcement/orders/oct-2020/adjudication-order-in-respect-of-gopal-vittal-bharti-telecom-ltd-rohit-krishan-puri-and-sunil-bharti-mittal-in-the-matter-of-trading-by-certain-entities-in-the-scrip-of-bharti-airtel-limited_47950.html and https://images.assettype.com/barandbench/2023-12/1f7f2efa-175f-4dde-b723-528a2330436f/Future_Corporate_Resources_and_ors_v__SEBI.pdf

This Article written by

CS Vallabh Joshi – Associate Director

This article is published on taxmann link below.

_________________________________________________________

https://www.taxmann.com/research/labour-laws/top-story/105010000000028715/impact-of-labour-codes-on-listed-companies-opinion

The post Impact of Labour Codes on listed companies first appeared on MMJC.

I. Introduction:

Acquisition-related disclosures under Schedule III[1] of the SEBI LODR Regulations often raise several practical and operational questions for listed entities.

While the regulation prescribes specific thresholds for disclosure, the real compliance challenge lies in identifying when an acquisition[2] become reportable, whether acquisitions falling below the specific thresholds are still required to be disclosed, what types of transactions are covered, and whether the nature of the investee entity impacts the disclosure requirement. These questions become particularly relevant in cases involving tranche-based acquisitions, conversion of securities, statutory voting rights, and investments in entities which are yet to be incorporated.

II. Whether an acquisition not crossing the threshold under sub-para 1 of Para A is required to be disclosed?

If in case when an acquisition does not meet the prescribed threshold under sub-para 1 (i.e. control or 20% or change etc.), it may still require disclosure if the cost of acquisition or price of exceeds materiality criteria under regulation 30(4)(i)(c) [i.e. the 2-2-5 criteria]. Accordingly, acquisition disclosures cannot be assessed only from the perspective of the specific thresholds under sub-para 1. A parallel assessment under the materiality criteria is also necessary.

For NBFCs and insurance companies, industry standards[3] clarify that for acquisitions of listed equity, convertible or debt, the primary trigger is the cost exceeding 2% of net worth. For any other type of acquisition, each of the prescribed materiality thresholds under Regulation 30(4)(i)(c) would continue to apply.

III. Practical compliance scenarios in acquisition disclosures:

The disclosure requirement may be better understood by examining the key elements of an “acquisition” and the circumstances in which the obligation may arise.

• Tranche-based acquisitions

Where a listed entity acquires shares in multiple stages, the disclosure trigger has to be assessed on an aggregate basis.

For instance, if a listed entity already holds 16% shares in a company and subsequently acquires an additional 4%, the aggregate holding reaches 20%. In such a case, the listed entity would be required to make timely disclosure upon crossing the 20% threshold.

However, separate acquisitions of 5% in three different tranches, aggregating to 15%, may not require individual disclosures merely under the acquisition threshold, unless any such tranche independently triggers the monetary materiality criteria or results in acquisition of control. The reporting obligation would arise once a subsequent acquisition takes the total holding to 20% or more.

Further, once the 20% threshold has been disclosed, any subsequent change exceeding 5% from the last disclosed holding would trigger a fresh disclosure obligation. Therefore, the listed entity must track not only the first acquisition crossing the threshold, but also subsequent changes from the last reported holding.

• Indirect acquisitions and conversion of securities

The meaning of “acquisition” under sub-para 1 of Para A is not limited to direct purchase of shares from the secondary market or fresh allotment of equity shares. Certain indirect events may also result in acquisition and, therefore, require disclosure evaluation.

The conversion of Compulsorily Convertible Preference Shares (CCPS), Convertible Debentures (CCDs), or warrants into equity constitutes an acquisition.[4] Listed entities must evaluate if the resulting equity shares lead to an acquisition of control, meets the 20% threshold, or hits monetary materiality thresholds.

Another important scenario relates to voting rights. Where a listed entity gains voting rights on preference shares due to non-payment of dividend for two years or more under Section 47[5] of the Companies Act, 2013, such voting rights may also require disclosure assessment. Although there may not be a fresh purchase of shares, the listed entity may acquire voting rights by operation of law, and the impact of such rights must be evaluated from a disclosure perspective.

• Nature of entity/ investee

Another important question is whether the acquisition disclosure requirement applies to all forms of entities or only to companies?

Sub-para 1 of Para A uses the term “company”. The Companies Act, 2013 defines a company as a company incorporated under the Companies Act, 2013 or under any previous company law.

The Act also separately defines a foreign company under section 2(42) of the Companies Act, 2013.

Therefore, on a plain reading, the disclosure requirement under sub-para 1 appears to cover a ‘Company’ as defined under the Companies Act, 2013, and may not extend to acquisition of an LLP, foreign company or body corporate.

IV. Conclusion:

The determination of a reportable event remains deeply contingent on the substance of the transaction, the specific nature of contractual control rights, and the precise timing of legally binding commitments. Ultimately, for a listed entity, navigating these requirements necessitates a holistic evaluation of every investment. Compliance teams must continue to vigilantly assess indirect acquisitions through convertible instruments and statutory voting shifts to ensure that the material information is communicated to the market accurately and within the prescribed timelines.

[1] Schedule III Part A, Sub-para 1 of Para A of the SEBI (LODR) Regulations

[2] “Acquisition” means:

1. acquiring control, whether directly or indirectly; or
2. acquiring or agreeing to acquire shares or voting rights in a company, whether existing or to be incorporated, whether directly or indirectly, such that
3. the listed entity holds shares or voting rights aggregating to 20% or more; or
4. there is a change in holding from the last disclosure made under the 20% threshold and such change exceeds 5%; or
5. the cost of acquisition or the price at which the shares are acquired exceeds the threshold specified under Regulation 30(4)(i)(c).

The amended proviso to sub-clause (c) of clause (ii) of Explanation (1) further states that acquisition of shares or voting rights aggregating to 5% or more in an unlisted company, and any change exceeding 2% from the last disclosure made under this proviso, shall be disclosed on a quarterly basis in the specified format. [Integrated filing (Governance)]

[3] Industry standards on regulation 30

[4] Industry standards on regulation 30

[5] Section 47(2) of the Act: Provided further that where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

The post Navigating ‘Acquisition’ disclosures: Trigger points and operational nuances first appeared on MMJC.

Introduction  

Securities and Exchange board of India (SEBI) had amended the Infrastructure Investment Trust Regulations 2014 (InvIT regulations) through an amendment notification dated 17^th April 2026. Through this amendment, SEBI had clarified that the Special Purpose Vehicles (SPV) with expired or terminated concession agreements would also be considered as SPVs subject to certain conditions. However, the said conditions were not specified in the said amendment notification.  

Hence SEBI has now come out with the said conditions through a separate circular dated 15^th May 2026. This circular prescribes 2 conditions for treating companies/LLP with expired concession agreement as SPV. In this article we shall understand these conditions and implications thereof.  

Conditions prescribed under circular  

Through amendment dated 17^th April 2026, a proviso was inserted in the definition of SPV prescribed under reg 2(1)(zy) of InvIT regulations. As per this proviso, a SPV who has no infrastructure project  due to termination or expiry of concession agreement can also be treated as SPV subject to certain conditions specified by SEBI.  

The SEBI has specified following 2 conditions through circular dated 15^th May 2026.  

1. “The Investment Manager shall either exit investment in such SPV by way of sale / liquidation / winding-up / merger of such SPV, or acquire any new infrastructure project in such SPV, within one year from –  

(a) completion/termination of concession agreement or such other agreement of similar nature, or  

(b) conclusion of all pending claims/litigations/tax assessments and related appeals, or  

(c) completion of defect liability period,  

whichever is later.”  

AND  

2. “Till the time investment in such SPV is held by the InvIT, adequate disclosures shall be made in the annual report of the InvIT including the following –  

(a) InvIT Level: The Investment Manager shall disclose a detailed breakup of the value of investments (gross and net basis) in the SPV(s) wherein the concession agreement or such other agreement of similar nature has ended/terminated.  

(b) SPV Level: The Investment Manager shall provide additional disclosures pertaining to each SPV wherein the concession agreement or such other agreement of similar nature has ended/terminated, which shall include the following information:  

(1) Brief details of the project, date when such agreement ended and status of vesting certificate or any other document issued by the concessioning authority upon successful completion of handover of the project to the said authority.  

(2) Assets and Liabilities of the SPV (including specific reserves, if any): Provide the nature and amount of respective carrying value of assets and liabilities (including specific reserves, if any) on broad/grouped basis as determined in the annual audited financial statements of the SPV.  

(3) Contingent Liabilities: Details of Contingent Liabilities of the SPV as set out in its annual audited financial statements.  

(4) Debt Repayment: Brief details of outstanding debt of the SPV, if any, along with repayment schedule.  

(5) Whether SPV has sufficient assets to meet its liabilities (including contingent liabilities). If not, how such liabilities are planned to be met.  

(6) Exit Strategy and Timeline: A clear plan of action detailing how and when the InvIT intends to exit its investment in the SPV or plans to acquire new infrastructure project, along with the brief details of steps taken so far and expected timeline for completion.  

(7) Other Material Details: Other material details related to such SPV including details related to pending claims, pending litigations, pending assessments, pending statutory/contractual obligations, balance period of defect liability period, etc.”  

Analysis of conditions  

The first condition aims at solving the practical difficulty faced by InvITs in immediately exiting the investment in SPV due to pending claims, litigations, and other such matters. This condition prescribes a timeline within which the investment must be exited post settlement of all such contingent matters. Also, the condition provides multiple options for exiting investment and the circular also clarifies that the time taken in obtaining regulatory approvals in mergers/winding up/liquidation etc. would not be counted in the period of one year.  

Second condition provides a mechanism to ensure transparency through appropriate reporting to unit holders about the financial impact of holding investment in SPV with expired concession agreement and the exit plan for withdrawing such investment. This condition aims to ensure investor protection in the backdrop of practical changes made to bring ease of doing business.  

Points to be considered  

As per the second condition, the InvITs have to give detailed information relating to SPV with expired concession agreement in the annual report of InvIT. Since the circular is effective immediately, this information needs to be given in the annual report of Financial Year (FY) 2026 which is now in the process of finalization.  

As per regulation 23 of InvIT regulations, the annual report must be submitted till 30^th June. Now we are already standing in the month of May. Hence InvITs are in the process of finalizing their reports. In such a situation, if any InvIT has investment in any such SPV whose concession agreement has expired, it will have to first collate all the information listed in the circular and then will have to include the same in the annual report. Considering the shortage of time due to approaching last date, this may prove to be a tedious task. Also, the InvITs through their investment managers will have to finalize an exit plan with specified timelines as it has to be disclosed in the annual report as per the circular.

Conclusion  

The conditions prescribed by SEBI through the circular are not a total surprise, as they were already proposed through consultation paper dated 5^th February 2026, which proposed amendments to Invit regulations. Further, considering the ease of functioning this amendment and the subsequent circular is expected to bring, there should not arise any difficulty in its compliance.

The post Compliance Pertaining to Status of SPV with Expired Concession Agreements – SEBI Circular dt: May 15, 2026  first appeared on MMJC.

The Companies Act, 2013 offers two distinct exemptions that, when combined, create a legal paradox for intermediate holding companies. Specifically, if an intermediate holding company avails exemption from preparing Consolidated Financial Statements (CFS), does it inadvertently lose exemption from shareholders’ approval for Related Party Transactions provided under fourth proviso of Section 188(1)?

This article examines whether this literal interpretation, which creates an irreconcilable hurdle, can be reconciled through a purposive reading of the statutory framework.

Exemption From Consolidation

As per Section 129(3) of the Companies Act, 2013 r/w Rule 6 of the Companies (Accounts) Rules, 2014 (Accounts Rules), preparation of consolidated financial statements by a company is exempt if it meets the following conditions:

1. If Company is Wholly Owned Subsidiary or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing for not objecting for consolidation and proof of the same is maintained by the Company;

2. No securities of Company are Listed or Proposed to be listed on any stock exchange, whether in India or outside India; and

3. its ultimate or any intermediate holding company files consolidated financial statements with the Registrar.

Exemption from Shareholders approval u/s 188

The fourth proviso to Section 188(1) exempts transactions between a holding company and its WOS from the requirement of shareholders’ approval. However, this relief is strictly conditional:

“…whose accounts are consolidated with such holding company and placed before the shareholders…”

Literal Rule V. Purposive Interpretation

The phrase “such holding company” in Section 188 indicates that for claiming said exemption, the consolidation must happen at the level of the company entering the transaction.

If we apply Literal Rule, the scenarios can be as follows:

· The Ultimate Parent (A Ltd): Since A Ltd prepares the CFS, any transaction between A Ltd and its step-down WOS (C Ltd) is exempt from shareholder approval. The accounts are consolidated at this level.

· The Intermediate Parent (B Ltd): If B Ltd enters into a transaction with its direct WOS (C Ltd), it faces a hurdle. Because B Ltd chose not to prepare CFS (relying on Rule 6), it cannot satisfy the condition that the accounts are “consolidated with such holding company” (B Ltd).

Purposive Interpretation

The purposive interpretation of the fourth proviso to Section 188(1) suggests that the legislative intent is to ensure transparency. If the ultimate parent consolidates the entire group, the underlying financial position of every subsidiary is already disclosed to the stakeholders who hold the actual economic interest.

Unlike Section 177, which protects creditors through Audit Committee oversight, Section 188 is purely shareholder centric. In a vertical structure, the ultimate shareholders already have “informed oversight” through the ultimate consolidation. Therefore, requiring an additional shareholder vote at the intermediate level offers no extra protection to shareholders. It therefore appears that intermediate holding companies can claim the exemption under the fourth proviso to Section 188(1)

Conclusion

The fourth proviso to Section 188(1) is not an independent requirement, but a consequential trigger. One may take a view that it does not exist to create a new obligation for consolidation; rather, it built upon the obligation created by Section 129 i.e. when consolidation is mandatory as per section 129.

The proviso uses the phrase “whose accounts are consolidated.” This refers to the financial statements that a company is legally mandated to prepare under the Accounting Rules1. If the law (Rule 6) provides a specific exemption from preparing CFS, then the legal “mandatory” requirement for consolidation at that level ceases to exist. If the obligation to consolidate is extinguished by an exemption, the subsequent condition (“and placed before shareholders”) loses its subject matter.

If the proviso were interpreted as an absolute factual requirement, then any company exempt under Rule 6 would be effectively disqualified from the RPT exemption. This would create a legislative absurdity. However, to ensure absolute certainty and avoid the risk of transactions being deemed voidable, an MCA clarification to this effect remains necessary.

By Abhishek Gupta and Vrushali Bhave Athavale

This article is published on taxguru link below.

https://taxguru.in/company-law/saving-consolidation-cost-rpt-approval.html

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