Author name: CBCL

[By Aditya Pandey] The author is a student of National Law University Odisha. Introduction Related-party transactions (RPTs) – deals between a company and persons or entities in its orbit (promoters, relatives, subsidiaries, etc.) – pose inherent conflict-of-interest risks. Under India’s Securities and Exchange Board of India (SEBI) rules and the Companies Act, these must be scrutinized and disclosed to protect minority shareholders. In recent years SEBI has dramatically broadened the RPT regime. The 2015 LODR Regulations (as amended) now sweep in not only a listed company’s dealings with its own related parties, but also inter-group arrangements and even certain third-party transactions that “benefit” insiders. For example, SEBI’s January 2021 amendments defined RPTs to include transactions between either a listed company or any of its subsidiaries and any related party of any group entity. In practice, this means a listed parent must track and approve a wide variety of inter-corporate deals at both Indian and foreign subsidiaries. SEBI’s rationale – echoed by experts – is that effective RPT oversight requires a group-wide lens. The obligations have cascading effects: the listed parent must identify its own related parties and inform its subsidiaries, while subsidiaries (even unlisted ones) must identify their related parties and report any material RPTs up the chain. As one law firm analysis explains, “to carry out the implementation of the RPT framework at the holding company level, the subsidiaries are also required to identify their related parties” and track their own RPTs against the approval thresholds of the listed parent. This group-wide definition promotes consistency but also creates ambiguity, especially for unlisted or foreign subsidiaries that are not directly governed by LODR. SEBI itself acknowledged this gap: in October 2024 it informally advised that unlisted subsidiaries must nonetheless use the LODR definition to identify related parties and RPTs. This “entity-agnostic” approach promotes uniformity; however, it gives rise to complex questions (discussed below) regarding the applicable legal framework in specific contexts. Key Regulatory Developments SEBI has continuously tightened RPT rules, particularly since 2021. Key changes include: Expanded scope (2021–22). Effective April 2022, SEBI’s amendments swept in cross-entity transactions. RPTs now cover, for example, deals between a listed company and the related parties of its subsidiaries, or between a subsidiary and related parties of the parent or another subsidiary. In other words, all group-related transactions are “RPTs” subject to audit committee and shareholder approvals under LODR. Similarly, any individual holding equity in the company on a beneficial basis was classified as a related party: initially, this applied to those with 20% ownership (from April 2022), and later, the threshold was reduced to 10% (from April 2023). These changes mirror global practices (for example, LODR borrowed the UK rule that a third-party deal is an RPT if its “purpose and effect” benefits an insider). Subsidiaries and thresholds. SEBI added detailed rules for subsidiaries’ RPTs. If a subsidiary (including foreign ones) transacts with any related party beyond certain thresholds, the listed parent’s audit committee must approve it. Specifically, any deal by a subsidiary (with its own related party) exceeding 10% of the listed parent’s consolidated turnover (or 10% of the subsidiary’s standalone turnover from Apr 2023) must get the parent audit committee’s nod. This effectively gives the Indian-listed parent oversight – even veto power – over large transactions by its overseas subsidiaries. Analysts note this raises potential conflicts (a parent’s directors approving deals in foreign subsidiaries) but also ensures uniform governance across the group. Approval processes and disclosures. SEBI has beefed up information and approval requirements. Audit committees must review long-term or “material” modifications to RPTs and obtain detailed information (business rationale, financial terms, valuations, etc.) before approval. Investor-level scrutiny also increased: in 2022, SEBI made it easier to trigger the requirement for shareholder approval by lowering the applicable threshold. Now any RPT exceeding ₹1,000 crore or 10% of consolidated turnover (whichever is lower) must go to shareholders – dramatically expanding the number of RPTs on which the public votes. (Previously the threshold was simply 10%.) Shareholders must receive detailed explanatory statements, including external valuation reports, to justify why even arms-length RPTs are in the company’s interest. Recent streamlining (2024). Late in 2024, SEBI responded to industry feedback for ease-of-doing-business. The December 2024 LODR amendments introduced some relief: routine transactions like uniform retail purchases by promoters or employees can be excluded from “related party” treatment if made on arm’s-length terms. Companies may now ratify small RPTs (under ₹1 crore annually) after the fact, whereas before every RPT required pre-approval. Remuneration to directors/KMPs below materiality need not go to the audit committee each time. Importantly, SEBI formally extended its omnibus approval mechanism to cover RPTs by subsidiaries. And new compliance was eased by integrating RPT disclosures into a single “integrated filings” framework. Overall, these amendments aim to balance transparency and efficiency. They underscore that RPT regulation is still evolving – most recently SEBI has issued model “Industry Standards” for the information to be given to committees/shareholders (effective late 2025) to further standardize disclosures. In practice, vigilant boards and audit committees must scrutinize RPTs. Audit members should demand justification and valuation reports for any significant deal, ensuring shareholders understand the rationale. As analysts have noted, post-amendment companies face a “sea-change in the regulatory framework for RPTs,” meaning they must step up internal processes – from identifying related parties to pre-approving and reporting transactions. In particular, audit committees now bear extra duty: beyond routine approvals they must actively review subsidiaries’ transactions (even foreign ones) and their material modifications. Compliance Challenges Despite these rules, practical challenges abound. A key issue is identification of related parties across the group. Under LODR Reg.2(1)(zb), a “related party” of a listed company includes anyone in its promoter/promoter-group, persons holding ≥10% (beneficial) shares, and others (including as per accounting standards). But what about unlisted or foreign subsidiaries? SEBI’s recent informal guidance says yes – even unlisted subsidiaries must follow the same LODR definition to identify their related parties for RPT compliance. This group-wide approach ensures consistency but can over-extend the law.

[By Prayas Das] The author is a student of National Law University, Odisha.   Introduction The Securities and Exchange Board of India (the Board), in recent times, has provided numerous investment options for the people, such as Mutual Funds, which offer stable returns with less risk to investors, thanks to tighter regulations under SEBI’s supervision. As temporal tides advance with the growth in the economy and increasing number of  High Net-worth Individuals (HNIs) who can afford to take more risk in terms of investment, SEBI introduced the SEBI  (Alternative Investment Funds) Regulations, 2012 to cater to the requirements and needs of the HNIs who wanted to invest beyond the stock market to gain more profit by taking more risk with less regulations from the board. The AIF is defined under Regulation 2(1)(b) as a privately pooled investment vehicle that collects funds from investors (Indian or Foreign). The minimum investment amount is Rs 1 Crore for investors, and for Directors, Employees, and Managers, the limit is Rs 25 Lakh. Recent SEBI investigations into HDFC Capital Affordable Real Estate Fund- I, which is a Category II AIF, sparked curiosity about the governance lapses, bias and influence of the sponsor, which can jeopardise the investors’ investment in the respective AIF. This article explores the structures of AIFs, SEBI’s governance rules, what went wrong in a recent case, and how the sponsor can influence the investment decision-making for its benefit at the expense of investors. Structure and Types of Alternative Investment Funds Under Regulation 3(1) of Chapter II, an AIF has to obtain a certificate of registration mandatorily from the Board, and only upon completion of that step can it perform as an AIF. Any entity shall seek registration as an AIF under three categories, which are given below: – Category I Alternative Investment Fund – This category is viewed as a nation builder, as it promotes socially and economically desirable sectors that the government or regulators want to encourage. The AIFs under this category are generally perceived to have a positive spillover effect on the economy, with the government considering providing such funds, incentives, or concessions. These funds include venture capital funds, social impact funds (SME Funds), etc. Category II Alternative Investment Fund – These types of funds do not fall under category I or III. They do not take on leverage or borrowing other than to meet daily operational requirements. These funds invest in long-term assets that offer good returns with manageable risks to knowledgeable investors. These consist of funds such as private equity funds (buying of shares in unlisted companies), debt funds (earning interest on capital, the funds used to buy bonds or debentures), etc. The funds registered under this category are ineligible to receive any specific concessions from the government. Category III Alternative Investment Funds – This type of fund is for those who want to employ diverse or complex trading strategies by employing leverage or borrowings. They are famous for their risk control strategies to make a profit during unstable market situations. One such fund is a hedge fund, which trades to make short-term returns with high risk. It also receives no specific concessions from the government. SEBI permits an Alternative Investment Fund under SEBI (AIF) Regulations, 2012 to be established as a trust, a limited liability partnership (LLP), or as a company. In these three structures, we can find trust as the most common mode of formation of an AIF, and popular due to the tax pass-through benefits it offers, where the investors have to pay taxes on the profit, not the trust under which as AIF is legally formed. Why AIFs Matter An AIF has a diverse portfolio as it invests in assets beyond the stock market, such as investing in unlisted companies, venture capital and infrastructure, which are not available through mutual funds or direct stock investing. With a high risk, it offers a higher return than other investment options due to the large pooled amount and flexible investment options with fewer regulations. The system of investments allows a company or organisation to seek investments, even if it is an unlisted one. This system of investment allows the investee and investors to grow more efficiently with less regulation from the regulator. The SEBI May 2025 Order: What Went Wrong Being a Category-II AIF is significant because such funds typically invest in long-term unlisted assets like real estate and private equity, and are subject to specific restrictions on leverage and regulatory exemptions that shape both their risk profile and fiduciary obligations.  In this context, HDFC Capital Advisors Limited (Applicant No. 1) acted as the Investment Manager for HDFC Capital Affordable Real Estate Fund – I (Applicant No. 2), which is categorized as a Category-II Alternative Investment Fund, with HDFC Bank Ltd. designated as its sponsor. Applicant No. 2 allocated Rs. 200 crores towards Non-Convertible Debentures (NCDs) of Acme Realties Pvt. Ltd (ARPL), in addition to Rs. 99 crores further invested in NCDs issued to ARPL by Ascent Construction Private Ltd. (ACPL). Both ARPL and ACPL were subsidiaries of Acme Housing (India) Pvt. Ltd (AHIPL), with HDFC Bank Ltd., as a sponsor of Applicant No. 2 being an existing lender to both subsidiaries of AHIPL. To simplify, both ARPL and ACPL (both subsidiaries of AHIPL) received funds from the AIF managed by HDFC Capital, which was sponsored by HDFC Bank, a creditor to all three entities. The amount invested by Applicant No. 2 in the NCDs of ARPL was transferred to the loan accounts (credit lines) of ARPL and AHIPL with HDFC (sponsor). These funds were utilized not only for the construction projects but also to repay existing loans and interest owed to HDFC Bank. It violates Regulation 21 (1) of the SEBI (AIF) Regulations, 2012, which mandates that the sponsor and investment manager must act in the best interest of the investors and disclose conflicts of interest. Redirecting investor capital to settle sponsor dues breaches fiduciary obligations and raises governance concerns. Why was this a governance

[By Adeeb Bakhtavar] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat. Introduction Early 2025 saw the ‘reverse flip’ of RazorPay from its US-based holding company to an indian parent entity after receiving the nod from the Ministry of Corporate Affairs. Zepto, a quick commerce startup, also received formal approvals from both the Singapore court and India’s National Company Law Tribunal to execute its cross-border merger, thereby becoming an Indian parent entity. According to a recent white paper published by Bay Capital shows that the value of India’s publicly listed digital-first firms is $90 million. While headlines celebrated it as a win for the startups and indian markets, what remained unsaid was that, how such structural shifts like these can cloak opaque capital arrangements under the guise of regulatory compliance? Reverse mergers that were once deployed as alternative IPO routes, are now being strategically used to embed shadow capital, exploit jurisdictional leniencies, and bypass regulatory gatekeeping. This blog will examine how the entities are leveraging the gaps in Indian corporate and securities law to channel shadow capital via reverse mergers. Conceptual Prelude: Reverse Mergers & Shadow Capital Reverse mergers, traditionally used as listing shortcuts (also known as reverse takeovers, RTOs) can be referred to as transactions where a private company acquires a publicly listed shell company. It allows the private company to bypass lengthy regulatory scrutiny and gain access to capital markets through corporate restructuring. According to the OECD Shadow Banking Report, “Shadow Capital” refers to the opaque, non-traditional sources of private capital that are not regulated, are often outside the regulated fund structure, and mimic institutional capital but are under grey zones. Shadow capital lacks fiduciary supervision as the investors may not be bound by LPAs (Limited Partner Agreements) or SEBI audit rules, which can be used to bypass the disclosures regarding the beneficial ownership or voting rights to SEBI, MCA, or the exchanges. The National Company Law Tribunal’s 2024 ruling in Hologram Holdings Private Limited v. NCLT introduced what is now referred to as the “Substantive Business Purpose Test” under Section 232 of the Companies Act, 2013. Moving beyond the formalities of statutory compliance, the Tribunal held that merger schemes must demonstrate a genuine business rationale or contribute meaningfully to the public interest. The court concluded that such arrangements constituted “merely accommodation entries or paper transactions” designed to “artificially increase the share prices and use the merged company as a vehicle of tax evasion and money laundering” 2025 Regulatory Framework Landscape The Stock Exchange Board of India (SEBI) amended the Issue of Capital and Disclosure Requirements (ICDR) regulations in March 2025, which marked the most significant regulatory evolution in reverse merger oversight since the original framework was established. As per the technical analysis of these amendments, the regulations struggle to be comprehensive yet contain some fundamental structural deficiencies that continue to enable sophisticated shadow capital deployment. The amended pre IPO transaction reporting framework, that is the regulation 58B(1): “(1) Every issuer shall, within twenty-four hours of such transaction, disclose to the recognised stock exchange(s) and simultaneously on its website, all pre-issuance placements of equity or convertible securities which aggregate to an amount in excess of ₹25 crore” Mandates all pre-IPO transactions exceeding ₹25 crore to must be reported to stock exchanges within 24 hours, despite this regulatory framework shadow capital operators can exploit the regulations through the method called “cascade structure” method, according to which a private entity involves structuring a transaction through multiple sub-₹25 crore tranches across different entities throughout a 12-month period in order to inject shadow capital into a listed shell company. While each transaction on its own is below the requirement for reporting threshold, the total amount of shadow capital deployed is significant. Such structured transactions are not recognised by SEBI’s current monitoring systems simply because of their lack in real-time aggregation capabilities. This is the concept of “connected transactions,” that very crucial in determining shadow capital but is not defined in ICDR regulations, and is not included by amended Regulation 58B(1). The subsidiary companies can subsequently merge with their parent company through simplified merger procedures under Section 233 of the Companies Act 2013, which can effectively infuse substantial shadow capital without triggering enhanced disclosure obligations. The enhanced materiality thresholds under the regulation 32A(4) introduce tiered materiality thresholds which includes ₹10 crore or 2% of net worth (whichever is lower) for companies with net worth below ₹500 crore, and ₹25 crore or 1% of net worth for companies with net worth exceeding ₹500 crore. In contrast, the U.S. Securities and Exchange Commission’s Aggregation Rule under Section 13(d) of the Securities Exchange Act codified in 17 C.F.R. § 240.13d‑3(c) mandates the disclosure of beneficial ownership by aggregating holdings across related entities and coordinated investors, while the European Union’s transparency regime under the Shareholder Rights Directive and Disclosure Regulation (EU 2017/1129) requires consolidated reporting of financial exposures, thereby preventing circumvention through fragmented sub-threshold structures, a safeguard currently absent in India’s regulatory framework. As per the subsidiary parking strategy, for example, any XYZ Limited, a listed shell company with net worth of ₹450 crore, can create multiple wholly-owned subsidiaries. Then, shadow capital is injected through transactions of ₹9.5 crore each into different subsidiaries over a 18-month period. Each transaction remains below the 2% materiality threshold, avoiding consolidated disclosure requirements. This successfully infuses shadow capital through reverse mergers, without triggering SEBI regulations. Furthermore, the amended LODR Regulation 27B Related Party Transaction (RPT) requires disclosure of all RPTs exceeding ₹1 crore on a consolidated basis, quarterly monitoring of cumulative RPT exposure, and an Independent director certification of arm’s length pricing. The current RPT disclosure requirements focus on individual transaction materiality rather than cumulative economic impact.  For example, A sophisticated shadow capital scheme involving Entity A (shadow capital source) creating apparent arm’s length transactions with Entity B (reverse merger target) could include Entity A providing “consultancy services” to Entity B at inflated rates (₹95 lakh per quarter to remain below disclosure thresholds). Then, Entity B could lease