For decades, Indian companies seeking to raise equity capital abroad relied on depository receipts rather than listing their equity shares directly on foreign exchanges. This changed in January 2024, when India introduced a direct listing framework for eligible Indian companies on GIFT IFSC exchanges. However, the framework remains limited in scope, with eligibility conditions and regulatory requirements determining which companies can use this route. Understanding who qualifies, which rules apply and what restrictions remain is essential before pursuing a direct listing.

The Architecture: Three Instruments

ndia’s direct listing framework, introduced on 24 January 2024, rests on three key legal instruments governing the listing of Indian companies’ equity shares on GIFT IFSC exchanges.

1. Companies Act, 2013, section 23(3), the enabling provision permitting prescribed classes of public companies to issue securities for listing on permitted stock exchanges in permissible foreign jurisdictions;
2. the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, made by the Ministry of Corporate Affairs; and
3. the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme, inserted as Schedule XI to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, together with a new rule 34 permitting a “permissible holder” to purchase or sell such shares.

The Annexure to the Scheme lists the international exchanges: the exchanges in the International Financial Services Centre in India, namely India International Exchange and NSE International Exchange. The permitted destination, in other words, is GIFT IFSC.

Who May Use it Today

The Rules apply to unlisted public companies, and to listed public companies “so far as they are in accordance with regulations framed or directions issued” by SEBI or IFSCA.

The Scheme repeats the division. A listed Indian company may issue or its shareholders may offer equity shares on an international exchange “subject to compliance with the conditions and other requirements as per the norms notified by the Securities and Exchange Board of India from time to time”. An unlisted public company’s route is subject to the norms notified by the Ministry of Corporate Affairs, which are the 2024 Rules.

This is the single most important practical point. The unlisted-company route is operational; the listed-company route depends on a SEBI framework. Reporting as recent as 28 February 2026 records that exchanges in the IFSC were still awaiting SEBI’s operating guidelines for listed companies. No notified SEBI framework for direct listing by already-listed Indian companies was traced as at 17 September 2026. A listed company contemplating the route should treat the position as not yet operative and confirm the current status.

A related but distinct development should be noted. On 13 July 2026 IFSCA issued a consultation paper proposing a regulatory framework for the direct listing of specified securities (equity shares and convertible securities) without a public offer on IFSC exchanges, under regulation 40 of the IFSCA (Listing) Regulations, 2024. It covers eligibility, the information document and minimum public shareholding. It is a proposal, not operative law. It does not supply the missing SEBI framework for already-listed Indian companies. As at 15 October 2026 no final IFSCA framework had been issued: IFSCA’s listing of instruments issued to 12 October 2026 shows none, and IFSCA officials indicated at the end of September 2026 that a framework was expected within months.

Eligibility: The Negative List

Under Rule 5 of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024, certain companies are ineligible for direct listing on GIFT IFSC exchanges. A company cannot issue equity shares for listing in a permissible jurisdiction if it:

• is registered under section 8 of the Companies Act or declared a Nidhi under section 406;
• is a company limited by guarantee that also has share capital;
• has outstanding deposits accepted from the public under Chapter V;
• has a negative net worth;
• has defaulted in payment of dues to any bank, public financial institution, non-convertible debenture holder or other secured creditor, unless the default has been made good and two years have passed;
• has applied for winding up under the Act or for resolution or winding up under the Insolvency and Bankruptcy Code, 2016, or has such proceedings pending against it; or
• has defaulted in filing its annual return under section 92 or financial statements under section 137 within the specified period.

The Scheme adds conduct-based conditions: neither the company nor its promoters, promoter group, directors or selling shareholders may be debarred from accessing the capital market; no promoter or director may be a promoter or director of another Indian company that is so debarred; the company and its promoters and directors must not be wilful defaulters; the company must not be under inspection or investigation under the Companies Act; and no promoter or director may be a fugitive economic offender. Past debarment that has expired by the date of listing does not disqualify.

Who May Hold the Shares

The Scheme creates the concept of a “permissible holder”: a holder, including a beneficial owner, of equity shares listed on an international exchange, expressly not a person resident in India. A holder who is a citizen of a country sharing a land border with India, an entity incorporated in such a country, or an entity whose beneficial owner is from such a country, may hold such shares only with Central Government approval. The permissible holder and its beneficial owner must ensure compliance, and the company must disclose this in its offer document.

A permissible holder may buy or sell such shares subject to the foreign portfolio investment limits under the NDI Rules. The company must ensure that the aggregate of shares issued or offered in the permissible jurisdiction, together with shares already held in India by persons resident outside India, does not exceed the foreign-holding limit under Schedule I of those Rules. Sectoral caps and prohibited-sector restrictions apply, and prior Government approval must be obtained where applicable.

Shares, Pricing and Voting

Form and ranking. Shares issued or offered must be in dematerialised form and rank pari passu with equity shares listed on a recognised stock exchange in India.

Pricing. Where shares are issued by a listed company, or offered by existing shareholders of shares listed in India, the price must not be less than the price applicable to a corresponding domestic mode of issuance. For an initial listing by an unlisted public company, the price is determined by a book-building process as permitted by the international exchange, and must not be less than fair market value under FEMA rules. Subsequent issues or transfers after the initial listing follow the pricing norms of the international exchange and the permissible jurisdiction.

Voting. Voting rights on such shares must be exercised directly by the permissible holder, or through the custodian acting only on that holder’s voting instructions.

Continuing Obligations

Two continuing obligations deserve board attention.

Filing in India. Under rule 4(4), the unlisted public company must file the prospectus in e-Form LEAP-1, with fees, within seven days after it is finalised and filed with the permitted exchange.

Accounting standards. Under rule 4(5), after listing, the company must comply with Indian Accounting Standards under the Companies (Indian Accounting Standards) Rules, 2015 in preparing its financial statements, in addition to any other accounting standard required for statements filed with the securities regulator or exchange concerned. A company that expected to move wholly to IFRS for its IFSC listing will therefore run two reporting frameworks.

The Scheme also requires compliance with the wider Indian legal framework, including the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992, the Depositories Act, 1996, FEMA, the Prevention of Money-laundering Act, 2002 and the Companies Act, and contemplates arrangements between the company, the Indian depository and the foreign depository.

Alongside these, the listing itself is governed on the IFSC side by IFSCA’s listing framework, which sets the disclosure and continuing-obligation requirements of the exchange.

What to Weigh Before Committing

• Confirm the route is open to you. If the company is already listed in India, the SEBI framework is the gating item.
• Run the negative list early. Several disqualifications, such as defaults or delayed filings, can be cured but require time, and one requires a two-year clean period.
• Model the foreign-holding headroom, since the listed shares count towards the same sectoral and aggregate limits as other foreign investment.
• Plan dual accounting, because Ind AS compliance continues after the international listing.
• Check the shareholder base against the land-border approval requirement, which applies at the level of beneficial ownership.

Frequently Asked Questions

1. Can Indian companies list shares directly on foreign exchanges?

Yes. Eligible Indian public companies can list equity shares on permitted exchanges in GIFT IFSC, subject to applicable rules.

2. Can an already-listed Indian company use the direct listing route?

The route depends on the applicable SEBI framework, which must be confirmed before proceeding.

3. Which exchanges permit direct listing under the 2024 framework?

The framework identifies India International Exchange (India INX) and NSE International Exchange (NSE IX) in GIFT IFSC.

4. Which companies are ineligible for direct listing on GIFT IFSC exchanges?

Certain companies, including Section 8 companies, Nidhis, companies with negative net worth and companies meeting specified default or insolvency conditions, are excluded.

5. Must companies comply with Indian accounting standards after listing?

Yes. Eligible unlisted public companies must continue complying with applicable Indian Accounting Standards (Ind AS) after listing.

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When an entity in GIFT IFSC receives a show-cause notice from the International Financial Services Centres Authority (IFSCA), one of the first questions is which statute governs the proceedings. The IFSCA Act, 2019 does not set out a separate list of offences or penalties. Instead, IFSCA enforcement powers rely on relevant provisions of the laws listed in the Act’s First Schedule. Identifying the applicable provision helps determine the penalty, the factors considered during adjudication and where an appeal can be filed.

The Borrowed Machinery

Section 13(4) of the IFSCA Act provides that the provisions of the statutes listed in the First Schedule relating to inspection, investigation, prosecution, settlement, compounding, adjudication of offences or penalties, the determination and recovery of fines and penalties, and “filing of appeals arising therefrom”, apply mutatis mutandis under the IFSCA Act.

IFSCA’s own description of its enforcement function states that it draws its investigation, inspection and examination powers from sections 13(1) and 13(2) of the IFSCA Act read with the Acts in the Schedule, and that its enforcement actions may comprise directions, warnings, monetary penalties, suspension or cancellation of registration, and prosecution.

The practical structure is therefore three-layered:

1. the conduct obligation in an IFSCA regulation (for example, the Fund Management Regulations or the Capital Market Intermediaries Regulations);
2. the penal provision in the relevant parent statute (for example, the SEBI Act or the Insurance Act); and
3. the procedure, drawn from the same parent statute through section 13(4), supplemented by IFSCA’s regulations.

How this Looks in an Actual Order?

IFSCA’s order of 31 July 2026 in the matter of Rising Omega Advisors Private Limited illustrates the mechanics. The proceedings arose from alleged breaches of the Fund Management Regulations, including regulation 74(2) (availability of the disclosure document), regulation 78(1) and 78(2) (managing money in accordance with the agreement, and consent for derivative exposure), regulation 80 (conditions for advisory services) and regulation 120(1).

Several features of the order repay attention.

• The adjudicating forum. The matter was decided by a three-member “Quasi-Judicial Authority for Enforcement”, after a show-cause notice and a personal hearing.
• The source of power. The order was passed under sections 12 and 13(4) of the IFSCA Act read with sections 11B(1) and 11B(2) of the SEBI Act, 1992 (read with sections 15A, 15B and 15EA of that Act), and read with the relevant regulation of the Fund Management Regulations.
• Transitional layering. Because the conduct straddled the replacement of the 2022 Fund Management Regulations by the 2025 Regulations, the order identified corresponding provisions under both sets, read with the savings provision in the 2025 Regulations. Entities under investigation for historical conduct should expect this pairing.
• Quantum. Penalties of ₹1,00,000 were imposed under each of sections 15A, 15B and 15EA of the SEBI Act, a total of ₹3,00,000, alongside directions to remedy the breaches within 45 days.
• Statutory factors. The order applied section 15J of the SEBI Act (disproportionate gain, loss to investors, repetitive nature of the default) and noted that, following the Supreme Court’s decision in Adjudicating Officer, SEBI v. Bhavesh Pabari (2019) 5 SCC 90, factors beyond those listed in section 15J may also be considered.
• Currency and interest. Consistent with section 13(5) of the IFSCA Act, the penalty was to be deposited in the foreign-currency equivalent at the RBI rate on the date of the order. Failure to pay within 45 days attracted simple interest at 12% per annum.
• Appeal. The order recorded that an aggrieved noticee may appeal to the Securities Appellate Tribunal (SAT) having jurisdiction, under section 15T of the SEBI Act read with section 13(4) of the IFSCA Act.

The Types of Action IFSCA Can Take

IFSCA’s published enforcement actions between January and September 2026 show the full range in use: advisories; warnings; directions, including interim and confirmatory directions; monetary penalties with directions; and cancellation of registration.

Two categories deserve particular note.

Interim and confirmatory orders. Where IFSCA acts urgently, it may issue an interim direction and later confirm it after hearing the entity. The sequence in one 2026 matter, an interim order in July followed by a confirmatory order in August, follows the familiar pattern of securities regulation, where an ex parte interim direction is followed by a post-decisional hearing.

Cancellation of registration. This is the most severe non-criminal outcome. It removes the legal basis for the activity and, because an IFSC unit’s Letter of Approval is tied to its authorised operations, it has consequences under the SEZ framework as well (see Article 49 on exit).

Where to Appeal an IFSCA Order?

Because the appeal right is borrowed, there is no single appellate forum for all IFSCA orders. The route depends on the parent statute under which the order was made.

Three practical consequences follow.

First, the limitation period is short, and it runs from receipt of the order. Second, the identification of the parent provision in the order itself is significant: it tells the entity where to appeal. Third, where the parent statute provides no statutory appeal, the scope of review is different in kind. Writ jurisdiction examines legality, jurisdiction and fairness rather than re-deciding the merits.

As of 17 September 2026, the IFSCA Act itself does not establish a dedicated appellate tribunal for IFSC matters, and the appellate position therefore depends on this borrowing exercise. Where an order does not clearly identify the parent provision, the appellate route may itself become contestable. That is an area in which the legal position is not settled by any reported authority known as at the cut-off date.

Before Enforcement: Two Procedural Routes Worth Knowing

• Complaint handling. IFSCA issued a circular on complaint handling and grievance redressal by regulated entities in the IFSC on 2 December 2024, and extended the implementation timeline by a circular of 13 January 2025. Regulated entities are expected to operate an internal complaints mechanism; a failure of that mechanism can itself become the subject of regulatory action.
• Informal guidance. The IFSCA (Informal Guidance) Scheme, 2024, notified by circular on 2 December 2024, allows a person to seek the Authority’s view on the application of a provision. Fees for such requests are set out in the annual fee circular. Guidance is not a substitute for compliance, but it can reduce the risk of a good-faith interpretation becoming an enforcement matter.

What an Entity Should Take From This

• Read the show-cause notice for the parent statutory provision, not only the regulation alleged to have been breached. That provision governs both the maximum penalty and the appellate forum.
• Expect the section 15J-type factors to be argued on quantum, and note that after Bhavesh Pabari those factors are not exhaustive.
• Remember the foreign-currency rule in section 13(5). A penalty expressed in rupees is payable in foreign-currency equivalent at the RBI rate on the date of the order, and delay carries interest.
• Preserve the 45-day appeal window from the date of receipt of the order where the parent statute provides a SAT appeal.

Frequently Asked Questions

1. What are IFSCA’s enforcement powers?

IFSCA can issue directions, warnings and monetary penalties, suspend or cancel registrations, and initiate prosecution under the applicable statutory framework.

2. Which laws govern IFSCA penalties?

Section 13(4) of the IFSCA Act, 2019 applies relevant enforcement and penalty provisions of the statutes listed in its First Schedule.

3. Where can an entity appeal an IFSCA order?

The appellate forum depends on the parent statute under which the order was passed. Securities-related orders may be appealed to the Securities Appellate Tribunal (SAT), where the applicable law provides for such an appeal.

4. What is the time limit for appealing an IFSCA order?

For orders covered by the relevant SAT appeal provisions, the usual limitation period is 45 days from receipt of the order, subject to the applicable law.

5. How is the penalty amount determined?

The applicable parent statute governs the penalty. In relevant securities matters, section 15J of the SEBI Act identifies factors for determining the penalty, although these factors are not exhaustive.

6. What happens if an IFSCA penalty is not paid on time?

Under section 13(5) of the IFSCA Act, the penalty is payable in the prescribed foreign-currency equivalent. Delayed payment may attract interest as specified by the applicable provision or order.

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GIFT IFSC is often described as having a “unified regulator”. That is accurate but incomplete. The International Financial Services Centres Authority (IFSCA) did not receive a new, self-contained code of financial regulation. What Parliament did in the International Financial Services Centres Authority Act, 2019 (the IFSCA Act) was more technical, and more consequential: it moved the powers of four Indian financial regulators under fourteen existing statutes to a single authority, but only within a defined territory and only for a defined subject-matter. Those two limits frame almost every legal question in GIFT IFSC.

Where the IFSCA Act, 2019 Applies: The Territorial Link to the SEZ Act

Section 2 of the IFSCA Act applies it to International Financial Services Centres set up under section 18 of the Special Economic Zones Act, 2005 (SEZ Act). Section 18(1) of the SEZ Act allows the Central Government to approve an IFSC in a Special Economic Zone, with a proviso that only one IFSC may be approved in any one SEZ.

Two consequences follow. First, IFSCA’s authority is territorial: it attaches to financial activity carried on by units in the IFSC, not to a financial activity simply because it is cross-border or denominated in foreign currency. Second, GIFT IFSC remains part of an SEZ. The SEZ Act, which under its section 51 also has overriding effect, continues to govern matters such as approval of units and their SEZ obligations. (Article 2 of this series examines what that dual character means for the legal status of an IFSC unit.)

The Transfer Mechanism: Section 13 and the First Schedule

The core of the IFSCA Act 2019 is section 13(1). “Notwithstanding anything contained in any other law”, all powers exercisable by an “appropriate regulator” under the Acts listed against it in the First Schedule are, in the IFSCs, to be exercised by IFSCA, in so far as they relate to the regulation of financial products, financial services or financial institutions.

The First Schedule lists four appropriate regulators and fourteen statutes:

Section 33 and the Second Schedule close the loop from the other side. Each parent statute was amended to insert a provision (for example, section 51A of the Banking Regulation Act, section 28C of the SEBI Act and section 44A of FEMA) stating that the parent regulator’s powers under that Act “shall not extend” to an IFSC and “shall be exercisable by” IFSCA, in so far as the regulation of financial products, services and institutions permitted in the IFSC is concerned. Both provisions came into force on 1 October 2020 under a Ministry of Finance notification of 29 September 2020.

The drafting is deliberate. IFSCA does not simply acquire a parallel power; within the IFSC, the parent regulator’s power is withdrawn to the same extent.

Procedure Travels with Power

Section 13(4) ensures that procedure follows substance. It provides that the provisions of the First Schedule statutes on:

• the manner of applying for, or withdrawing, recognition or registration, and furnishing information;
• inspection, investigation, prosecution, settlement, compounding, adjudication, and the filing of appeals arising from these; and
• the determination and recovery of fees, fines and penalties,

apply mutatis mutandis to financial products, services and institutions under the IFSCA Act.

In practice, this means the enforcement architecture of the parent statute generally follows the activity. A question about how a penalty on a securities-market intermediary in the IFSC is adjudicated or appealed is therefore answered by reading the relevant parent statute through section 13(4), together with IFSCA’s own regulations. It is not answered by the IFSCA Act alone. (Article 4 considers enforcement and appeals in detail.)

Section 13(5) adds a distinctly IFSC feature: penalties, fines, fees and settlement amounts are collected in the foreign-currency equivalent. The conversion uses the RBI reference rate on the date of the order. Under section 13(6), sums realised as penalties or fines are credited to the Consolidated Fund of India in rupees.

Defining the Perimeter: “Financial Product” and “Financial Service”

The subject-matter limit is set by section 3(1). “Financial product” covers securities, contracts of insurance, deposits, credit arrangements, certain foreign currency contracts, and anything the Central Government notifies. “Financial service” is defined through fourteen sub-clauses, from dealing and deposit-taking to advice and payment services, again with a residual power of notification.

That residual power has been used to widen the perimeter well beyond conventional finance. Examples include:

• aircraft leases (including operating, financial and hybrid leases) as a financial product, and Global In-house Centres as a financial service (notifications of 16 October 2020);
• book-keeping, accounting, taxation and financial crime compliance services as financial services (notification of 18 January 2024). These are subject to conditions that the providing units must not be formed by splitting up, reconstructing or reorganising a business already in existence in India, and must not take over existing contracts or work arrangements from group entities in India;
• operating leases of specified oilfield equipment, specified by IFSCA through a notification dated 5 January 2026 issued under an earlier Central Government notification of 14 December 2021 that enabled operating leases of products or equipment.

Whether IFSCA regulates an activity can therefore turn on a Gazette notification rather than on the Act itself.

What the IFSCA Act, 2019 Does Not Do?

Three limits deserve emphasis, because commercial summaries often blur them.

It does not displace Indian law generally. Section 30 gives the IFSCA Act overriding effect only against inconsistent provisions. Laws outside the First Schedule continue to apply in the IFSC unless they are modified. Examples include company law, income-tax, GST, insolvency, arbitration, anti-money-laundering and data-protection legislation. Section 31 lets the Central Government disapply or modify other Central Acts for IFSC financial products, services and institutions. That power has a parliamentary safeguard: a draft of the notification must be laid before both Houses for thirty days. Absent such a modification, or a modification under the relevant Act’s own enabling power, the general law governs.

It transfers the powers of regulators, not of the Central Government. Section 13 and the Second Schedule speak of powers exercisable by the RBI, SEBI, IRDAI and PFRDA. Rule-making powers that a parent statute vests in the Central Government are not, on the text, transferred to IFSCA. FEMA is the most significant example.

Its carve-out is limited to the IFSC. Each Second Schedule provision withdraws the parent regulator’s powers only “in so far as” the regulation of financial products, services and institutions permitted in the IFSC is concerned. On the text, the parent regulator’s jurisdiction over persons outside the IFSC is not displaced merely because those persons deal with an IFSC entity. For example, rules governing an Indian resident’s outward remittance continue to come from the RBI and the Central Government. Several articles in this series (notably Articles 12, 13 and 50) turn on this boundary.

Other Structural Provisions Worth Knowing

• Currency (section 20): financial-services transactions in an IFSC are to be in the foreign currency IFSCA specifies by regulations, in consultation with the Central Government.
• Policy directions (section 21): IFSCA is bound by the Central Government’s written directions on questions of policy.
• Parliamentary oversight (sections 28–29): every IFSCA regulation must be laid before Parliament, which may modify or annul it.
• Composition (section 5): the RBI, SEBI, IRDAI and PFRDA each nominate an ex officio member of IFSCA.

Commencement

The Act received assent on 19 December 2019 but commenced in stages: IFSCA was established on 27 April 2020 (head office, Gandhinagar); sections 12, 17–26, 28, 31 and 32 commenced on 21 August 2020; and sections 13 and 33 on 1 October 2020.

A working Method

For any GIFT IFSC question, three steps usually locate the governing law:

1. Is the activity a notified or defined financial product or service carried on by an IFSC unit? If so, IFSCA regulations, and the parent statute as applied through section 13, are the first port of call.
2. Is a Central Government instrument involved? If so (for example, FEMA rules or a section 31 modification), the Government instrument governs, not IFSCA.
3. Is the question outside the First Schedule altogether? Tax, company, insolvency and arbitration questions are examples. If so, the general Indian statute applies unless it has been specifically modified for the IFSC.

As of 17 September 2026, the statutory text described above remains unamended. Much of the regulatory substance, however, now sits in IFSCA’s regulations, which change frequently.

Frequently Asked Questions

1. What is the IFSCA Act, 2019?

The IFSCA Act, 2019 establishes a unified regulator for financial products, services and institutions operating in International Financial Services Centres (IFSCs).

2. What are the main powers of IFSCA under the Act?

Under Section 13, IFSCA exercises specified regulatory powers of the RBI, SEBI, IRDAI and PFRDA within IFSCs.

3. Does the IFSCA Act override all Indian laws?

No. It overrides inconsistent provisions only to the extent provided by the Act. Other Indian laws continue to apply unless specifically modified.

4. Which laws fall under IFSCA’s regulatory authority?

The First Schedule covers 14 statutes relating to banking, securities, insurance, pensions and other financial activities.

5. Does IFSCA regulate all cross-border financial transactions?

No. Its jurisdiction depends on the activity, the IFSC territorial boundary and whether the activity falls within the defined or notified financial products and services.

The post One Regulator, Fourteen Statutes: How the IFSCA Act, 2019 Allocates Regulatory Power in GIFT IFSC appeared first on Bhatt & Joshi Associates.

Executive Summary

The gift city vs mainland india fund debate has emerged as one of the most consequential structural decisions facing fund managers, treasury departments, and financial intermediaries in India as of 2026. Gujarat International Finance Tec-City (GIFT City), located in Gandhinagar, Gujarat, hosts India’s sole International Financial Services Centre (IFSC) and operates under a distinctive regulatory and fiscal architecture that differs materially from the mainland Indian framework. The International Financial Services Centres Authority (IFSCA), established under the IFSCA Act 2019, functions as the unified regulator for all financial services conducted within the IFSC, consolidating oversight that on the mainland would be distributed across the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (IRDAI).

This article provides a structured comparative analysis of the key dimensions — taxation, currency regime, regulatory framework, eligible investor base, listing infrastructure, and operational costs — that should inform the domicile decision for funds and treasury structures. The analysis is grounded in the statutory framework as it stands in June 2026, including the Income Tax Act 1961, the Foreign Exchange Management Act 1999 (FEMA), IFSCA (Fund Management) Regulations 2022, and applicable CBDT notifications. The article is strictly educational and does not constitute legal or financial advice.

Statutory Framework

The IFSCA Act 2019 and the GIFT City IFSC

The IFSCA Act 2019 established the International Financial Services Centres Authority as a statutory body with jurisdiction over all financial products, financial services, and financial institutions operating within an IFSC. Prior to the enactment of the IFSCA Act, entities in GIFT City operated under the concurrent jurisdiction of multiple regulators — SEBI for capital markets, RBI for banking and forex, and IRDAI for insurance — which created jurisdictional ambiguity. The IFSCA Act resolved this by vesting consolidated regulatory authority in a single body, making GIFT City a genuine single-window regulatory jurisdiction.

The IFSC is a notified zone under Section 2(q) of FEMA 1999, and the Foreign Exchange Management (International Financial Services Centre) Regulations 2015 (as amended) govern foreign exchange transactions within the IFSC. The fundamental premise is that for FEMA purposes, an IFSC unit is treated as a person resident outside India, enabling it to transact in foreign currencies without the exchange control restrictions that apply to mainland entities.

IFSCA (Fund Management) Regulations 2022

The IFSCA (Fund Management) Regulations 2022 (FMR 2022) govern the registration, operation, and winding up of fund management entities (FMEs) and funds within the GIFT City IFSC. The FMR 2022 establishes three principal categories of funds: Venture Capital Schemes, Restricted Schemes (analogous to Category I and II AIFs on the mainland), and Retail Schemes. Registration requirements, minimum corpus thresholds, and eligible investor criteria are set out in the FMR 2022 and differ in significant respects from the SEBI (Alternative Investment Funds) Regulations 2012 that govern mainland AIFs.

Under the FMR 2022, FMEs are permitted to manage funds that primarily invest in assets outside India, as well as certain domestic Indian assets through specified routes. The regulations permit a fund established in the IFSC to be structured as a company, limited liability partnership, trust, or contractual arrangement, offering structural flexibility that exceeds what is available to mainland AIFs which are predominantly trust-based.

Taxation: Section 80LA of the Income Tax Act 1961

The most significant fiscal incentive for IFSC entities is the deduction available under Section 80LA of the Income Tax Act 1961. An IFSC unit is eligible to claim a deduction of 100 percent of its income from specified activities for any ten consecutive years within the first fifteen years of commencement of operations. The qualifying income encompasses income from banking, insurance, fund management, and specified financial services conducted from the IFSC. It is important to note that the deduction applies to income arising from operations within the IFSC and is subject to conditions including filing of a return of income and obtaining a report from a chartered accountant.

Beyond Section 80LA, the fiscal architecture for IFSC entities includes: exemption from Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) on transactions on IFSC exchanges; exemption from Dividend Distribution Tax (DDT) (now subsumed into the dividend income regime post the Finance Act 2020, but the IFSC regime provides for specific carve-outs); favourable treatment of capital gains arising from transfer of securities listed on IFSC exchanges to non-residents under Section 47(viiab) of the Income Tax Act; and a reduced withholding tax rate of 4 percent (under Section 194LC and 194LD in applicable contexts) on interest income paid by IFSC units to non-residents.

Foreign Exchange and Currency Regime

FEMA 1999 and the FEMA (IFSC) Regulations establish the operative currency framework. Transactions within the IFSC are denominated in foreign currencies — principally the United States Dollar — rather than in Indian Rupees. An IFSC unit is permitted to open and maintain accounts in foreign currency with banks operating in the IFSC. The notional treatment of IFSC units as non-residents under FEMA means that capital flows between an IFSC unit and overseas counterparties are largely free of exchange control approvals that would otherwise be required under the Liberalised Remittance Scheme or the External Commercial Borrowing framework.

Mainland Indian entities, by contrast, operate in Indian Rupees and are subject to the full ambit of FEMA capital account controls, RBI approval requirements for certain transactions, and the hedging obligations that accompany foreign currency exposures.

Procedural Landscape

Comparative Table: GIFT City IFSC vs Mainland India — Fund and Treasury Domicile

Registration Process for an FME in GIFT City IFSC

The process for establishing a Fund Management Entity in the GIFT City IFSC under the FMR 2022 involves the following sequential steps.

First, the applicant entity must be incorporated or registered in the IFSC — this may be a company incorporated under the Companies Act 2013 with a registered office in the IFSC, an LLP formed under the Limited Liability Partnership Act 2008, or a trust constituted under applicable law. Second, the applicant submits an application for registration as a Fund Management Entity to the IFSCA in the prescribed form, along with prescribed fees, a business plan, details of key managerial personnel, and disclosures relating to the principal shareholders. Third, the IFSCA reviews the application, may seek clarifications, and upon satisfaction grants a Certificate of Registration in the applicable category (Retail FME, Restricted FME, or Venture Capital FME). Fourth, the registered FME must appoint a compliance officer, a principal officer with specified qualifications, and establish risk management and compliance frameworks. Fifth, for each fund to be launched, a scheme document (private placement memorandum or scheme information document) is filed with the IFSCA, and the fund is constituted in accordance with the structural requirements of the FMR 2022.

Treasury Domicile Considerations

For corporate treasury operations, the GIFT City IFSC permits the establishment of IFSC Banking Units (IBUs) by Indian and foreign banks. An IBU is a branch of a bank operating within the IFSC and is treated as a foreign branch for FEMA purposes. Corporates with significant foreign currency borrowings, trade finance requirements, or multi-currency treasury operations may find that housing treasury activities through an IFSC-domiciled structure — either through a wholly-owned subsidiary or through IFSC-eligible instruments — reduces FEMA compliance burdens and provides access to competitive international interest rates. However, the inability of IFSC units to directly serve Indian residents in many product categories means that a hybrid structure maintaining both mainland and IFSC entities is common in practice.

Key Judicial Precedents

Indian courts have not, as of June 2026, produced a definitive body of jurisprudence specifically on GIFT City IFSC fund structures, reflecting the relative novelty of the framework. However, several precedential principles from the Supreme Court of India bear on the interpretation of IFSC-related provisions.

The Supreme Court’s decision in Commissioner of Income Tax v. Vodafone International Holdings BV (2012) 6 SCC 613 established the primacy of substance and form in international tax structuring and the importance of examining the true character of transactions. While the case predates the IFSC framework, its analytical approach to treaty and statutory interpretation remains relevant to IFSC entities relying on beneficial tax provisions: the court emphasised that legitimate structuring aimed at tax efficiency within statutory parameters is permissible, but the substance of the arrangement must match its form.

On the interpretation of Section 80LA, the Madras High Court in CIT v. Sak Soft Ltd (2009) 180 Taxman 89 considered the conditions for claiming special economic zone deductions (under the predecessor SEZ framework) and affirmed that the deduction is available provided the statutory conditions are strictly complied with. The principle of strict but not pedantic compliance with tax incentive provisions in SEZ/IFSC contexts has been applied in subsequent ITAT orders.

Regarding the FEMA treatment of IFSC units, the Reserve Bank of India’s operational guidelines and IFSCA circulars constitute the primary quasi-regulatory instruments, and there are no Supreme Court decisions specifically addressing the non-resident characterisation of IFSC units under FEMA. The legal framework has largely operated within the administrative domain.

On the question of whether SEBI regulations apply to IFSC entities, the jurisdictional delineation established by the IFSCA Act 2019 — specifically Section 13, which gives IFSCA primacy over financial services in IFSCs — has been consistently applied at the administrative level, with SEBI formally recognising IFSCA’s exclusive jurisdiction over IFSC fund managers.

Conclusion

The gift city vs mainland india fund domicile decision in 2026 involves a nuanced balancing of significant fiscal advantages against structural constraints. The GIFT City IFSC offers a compelling proposition for fund managers and treasury units targeting non-resident capital: a unified regulatory framework under IFSCA, a 100 percent income tax deduction under Section 80LA for ten of the first fifteen years of operation, exemption from STT/CTT, favourable capital gains treatment for non-residents on IFSC exchange-listed securities, and full foreign currency operations outside the domestic FEMA capital account controls.

The mainland India framework, by contrast, offers access to resident Indian investors, an established infrastructure and service provider ecosystem, and regulatory familiarity. For fund managers whose target investor base includes Indian resident HNIs, family offices, or domestic institutions, a mainland AIF registration under SEBI regulations remains the appropriate structure.

In practice, the most sophisticated fund architectures in 2026 employ parallel structures — an IFSC-domiciled FME or fund for international capital, and a SEBI-registered AIF on the mainland for domestic capital — with appropriate ring-fencing to ensure regulatory compliance in each jurisdiction. The IFSCA has signalled a continued legislative and regulatory push to expand the scope of permissible activities within the IFSC, and the framework is expected to evolve further.

Practitioners and fund managers navigating the GIFT City vs mainland India domicile question should undertake detailed due diligence across the regulatory, tax, and investor relations dimensions, taking particular care to assess whether the investor base sought is eligible to invest in an IFSC-domiciled fund and whether the substance requirements for Section 80LA claims will be satisfied.

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The Securities and Exchange Board of India (SEBI) has fundamentally restructured the compliance architecture for listed entities through a series of progressive amendments spanning late 2025 and early 2026. The culmination of these reforms—primarily driven by the SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2025, and the subsequent 2026 Amendment Regulations—reflects a departure from the “one-size-fits-all” regulatory approach.

The regulatory intent is clear: to ease the compliance burden on large conglomerates by rationalizing materiality thresholds, while simultaneously tightening oversight on subsidiary-level transactions and accelerating the digitization of investor services. This publication provides a doctrinal and operational analysis of the revised SEBI LODR Regulations 2026 framework for corporate boards, compliance officers, and institutional stakeholders.

Overhaul Of Related Party Transactions (RPT): The Graded Materiality Framework

Prior to the recent amendments, Regulation 23(1) of the SEBI LODR mandated shareholder approval for any RPT exceeding the lower of 10% of the consolidated turnover or a fixed static threshold of ₹1,000 Crore. For massive conglomerates, this fixed ceiling resulted in an avalanche of routine operational transactions requiring shareholder approval, leading to acute compliance fatigue.

Effective December 2025, SEBI abolished the static ₹1,000 Crore threshold. Instead, the newly inserted Schedule XIIintroduces a graded, scale-based framework linked to the listed entity’s annual consolidated turnover:

• Turnover up to ₹20,000 Crore: Materiality is triggered at 10% of the annual consolidated turnover.
• Turnover above ₹20,000 Crore up to ₹40,000 Crore: Threshold is ₹2,000 Crore + 5% of the turnover in excess of ₹20,000 Crore.
• Turnover above ₹40,000 Crore: Threshold is ₹3,000 Crore + 2.5% of the turnover in excess of ₹40,000 Crore, subject to an absolute overall cap of ₹5,000 Crore.

Strategic Impact: This sliding scale significantly reduces the frequency of shareholder voting for routine commercial transactions of mega-corporations, capping the maximum regulatory threshold at ₹5,000 Crore rather than ₹1,000 Crore.

Subsidiary RPT Approvals: The “Lower Of” Doctrine And The Absolute Floor

The second proviso to Regulation 23(2) governs the jurisdiction of the listed parent entity’s Audit Committee over RPTs executed independently by its unlisted subsidiaries. To prevent regulatory arbitrage while avoiding micro-management, SEBI has refined the trigger limits:

1. The Absolute Floor: An Audit Committee’s prior approval is now only required for transactions exceeding ₹1 Crore. If a transaction is below ₹1 Crore, it is entirely exempt from the parent Audit Committee’s purview, even if it exceeds 10% of the subsidiary’s turnover.
2. The “Lower Of” Test: For transactions above ₹1 Crore, approval is required if the transaction value exceeds the lower of:
   • 10% of the annual standalone turnover of the subsidiary; OR
   • The materiality threshold prescribed for the listed parent entity under the new Schedule XII.

Clarification on Omnibus Approvals: The amendments explicitly codify the validity of shareholder omnibus approvals. Approvals obtained at an Annual General Meeting (AGM) are valid strictly until the date of the next AGM, ensuring annual scrutiny of recurring transactions.

Expanded Exemptions: KMP And Retail Purchases

In a pragmatic move to reduce administrative bottlenecks, SEBI has expanded the scope of exemptions for ordinary-course retail transactions.

Previously, the exemption from RPT approval for purchasing goods or services on uniform terms was limited only to directors and employees. Under the amended regime, this exemption expressly covers Key Managerial Personnel (KMPs) and the relatives of directors/KMPs. Consequently, if a spouse or dependent of a KMP purchases the company’s retail products or services at standard employee discount rates, the listed entity is no longer required to classify and report every single purchase as an RPT.

Investor Services And Mandatory Demat Credit Under SEBI LODR Regulations 2026

The SEBI LODR (Amendment) Regulations, 2026, notified in January 2026, overhaul the investor service mechanism by substituting Regulation 39(2).

• Direct Demat Credit: SEBI has mandated that listed entities and their Registrars to an Issue and Share Transfer Agents (RTAs) must effect the credit of securities strictly in dematerialised form for all investor service requests (such as split, consolidation, renewal, or issuance of duplicate securities).
• Abolition of Letter of Confirmation (LOC): The intermediate LOC mechanism has been completely removed. Upon processing a valid request within the statutory 30-day timeline, the securities will be directly credited to the investor’s demat account, massively reducing operational risks and transit delays.

Furthermore, Regulation 40(1) has been amended to provide a highly restricted, temporary special window (February 2026 to February 2027) allowing the registration of physical transfers strictly for transfer deeds executed prior to April 1, 2019, subject to the original share certificates being available.

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Introduction: From Regulatory Framework to Operational Implementation

Setting up a GIFT City PMS in 2026 is not merely a matter of understanding the legal and regulatory framework. It requires translating that framework into a practical and operational structure that can withstand scrutiny from the International Financial Services Centres Authority, satisfy substance requirements, comply with cross-border investment rules, and operate efficiently in practice.

Parts 1 through 5 of this India Market Access Series have already established the legal, regulatory, and tax architecture for a foreign investment adviser seeking to offer discretionary portfolio management services to Indian residents through the GIFT City IFSC:

• Part 1: Why the onshore Securities and Exchange Board of India framework forecloses the route (Regulations 23(1), 24(3), 24(9), 24(10), the 2011 Outsourcing Circular, and the ASK Wealth Advisors informal guidance)
• Part 2: How the IFSCA (Fund Management) Regulations, 2025 open the GIFT City PMS pathway (FME categories, branch structure, Regulation 7(7) substance requirements, and PMS provisions)
• Part 3: How Indian residents can be lawfully solicited through the mainland-distributor model confirmed by the LGT Wealth India guidance of August 2025
• Part 4: Why the GIFT City PMS must be structured as an outbound-only vehicle (FEMA round-tripping restrictions, LRS mechanics, and FPI registration barriers)
• Part 5: The complete tax framework (Section 147 holiday for the FME, investor-level capital gains taxation, and DTAA treatment)

This final article translates the legal and regulatory structure into a complete GIFT City PMS setup guide—explaining the two entities required, why each is necessary, how they interact commercially and legally, what physical presence in GIFT City actually requires (with the Neo Asset Management Private Limited warning order serving as a cautionary precedent), the realistic implementation timeline from strategic decision to first live client, and the key unresolved questions where informal guidance from IFSCA should be sought before making operational commitments.

Key question this article answers: What does it actually take to establish and operate a compliant, commercially viable, and regulatorily robust GIFT City PMS for Indian clients?

Part 1: GIFT City PMS Two-Entity Framework — The Complete Operational Architecture

The Two Entities and Their Roles

A compliant GIFT City PMS structure generally requires two legally distinct but commercially connected entities.

Why the IFSC Branch Is Necessary

The IFSC branch of the foreign parent is the only viable structure under which a foreign investment adviser can lawfully offer discretionary PMS over global securities to Indian residents.

Four reasons support this conclusion:

1. The onshore route is foreclosed. A SEBI-registered mainland PMS cannot manage foreign securities under Regulation 24(3), cannot act on foreign parent advice under Regulation 24(10), and cannot receive intra-group investment research under the 2011 Outsourcing Circular. These prohibitions are structural.
2. The branch form avoids the outsourcing problem. A subsidiary is a separate legal entity. Advice and research from the foreign parent may become “advice of another entity” or “outsourcing.” A branch is the same legal entity as the parent.
3. The IFSC expands the investment universe. Regulation 73(3) of the IFSCA (Fund Management) Regulations permits investment in global securities.
4. The IFSC provides tax benefits. Section 147 of the Income Tax Act, 2025 applies only to IFSC units.

Why the Mainland Distributor Is Necessary

The mainland distributor is necessary because, without it, the IFSC FME would be forced to rely on reverse solicitation, which is commercially restrictive and legally uncertain.

The LGT Wealth India guidance of August 2025 confirmed that a SEBI-regulated mainland entity can actively solicit Indian clients for IFSC products and receive commissions from the IFSC issuer.

The mainland distributor operationalises that model.

The Commercial and Legal Relationship Between the Two Entities

The IFSC FME and mainland distributor are connected through a distribution agreement.

The key commercial and legal features include:

• The distributor is compensated through a trail commission paid periodically from the FME’s management fee pool.
• The distributor performs client acquisition and servicing.
• The distributor does not perform discretionary portfolio management.
• The IFSC FME retains regulatory responsibility and performs all portfolio management functions.

Where the distributor is an affiliate of the foreign parent, related-party compliance issues may arise under both SEBI and IFSCA frameworks. These can typically be managed through:

• proper disclosures,
• conflict-of-interest policies, and
• arm’s-length commission structures.

The intra-group nature does not invalidate the structure.

Part 2: GIFT City PMS Physical Presence Requirements — The Neo Asset Management Warning

Why Physical Presence Is Operationally Critical

The substance requirement under the Fund Management Regulations is one of the most operationally significant obligations in a GIFT City PMS setup.

Substance is not satisfied by:

• an office address on letterhead,
• a lease agreement alone,
• a Principal Officer who resides in Mumbai and visits weekly,
• or a Compliance Officer working remotely from Bengaluru.

Physical presence means genuine operational presence in GIFT City.

The Neo Asset Management Warning Order — 2 May 2025

On 2 May 2025, IFSCA issued a formal warning order to Neo Asset Management Private Limited (IFSC Branch) under Regulation 143 of the IFSCA (Fund Management) Regulations, 2022.

The sequence was as follows:

1. July–October 2024: IFSCA conducted surprise visits and found the Principal Officer and KMPs absent.
2. September 2024: Advisory letter issued.
3. February 2025: Show Cause Notice issued.
4. 3 April 2025: Personal hearing conducted.
5. 2 May 2025: Formal warning issued stating further non-compliance could lead to cancellation of registration.

Lessons from the Neo Asset Management Precedent

Lesson 1 — Enforcement is physical.
IFSCA uses surprise visits, not merely paperwork review.

Lesson 2 — Escalation is real.
The path from advisory to cancellation is structured and serious.

Lesson 3 — “Based out of IFSC” is substantive.
It means the primary place of work, not an occasional presence.

What Genuine Physical Presence Requires

In practice, this generally requires:

• The Principal Officer to live in the Gandhinagar / Ahmedabad region;
• The Compliance Officer to be practically resident;
• The office to be genuinely staffed during working hours;
• Senior investment decision-makers to be physically present when IFSC decisions are made.

This creates real operational costs, including:

• relocation costs,
• housing allowances,
• and staffing overhead.

Part 3: GIFT City PMS Implementation Timeline — From Decision to First Live Client

Overview of the Timeline

A realistic GIFT City PMS implementation timeline is generally 9 to 15 months.

Key Decision Points in Phase 1

Choice of FME Category

For discretionary PMS, Registered FME (Non-Retail) is generally correct.

Requirements:

• USD 500,000 net worth.

Retail FME requires:

• USD 1,000,000 net worth,
• additional KMPs.

Branch vs Subsidiary

The branch structure remains preferable because subsidiaries may reintroduce inter-entity outsourcing issues.

Mainland Distributor Identity

Existing affiliates may reduce timelines.

A new SEBI entity may add 4–8 months.

Principal Officer Identification

This is often the critical path.

The candidate must:

• meet qualification requirements;
• meet experience requirements;
• be willing to relocate.

Part 4: Key Regulatory Questions for GIFT City PMS Setup

The framework is mostly settled, but some operational questions remain unresolved.

Open Question 1 — Trade Execution Through Foreign Infrastructure

Can trades initiated in GIFT City be executed through foreign infrastructure?

Defensible answer: likely yes.

Reasoning:

• branch and parent are same legal entity;
• decision is made in GIFT City;
• execution is implementation.

Risk remains due to lack of explicit guidance.

Open Question 2 — Proactive Servicing Calls

Can the IFSC FME proactively communicate with Indian clients post-onboarding?

Defensible answer:

Likely servicing rather than solicitation.

Risk remains.

Open Question 3 — Self-Marketing Within IFSC

Can an IFSC FME market directly to IFSC-based entities?

Defensible answer:

Likely yes.

Conservative firms may seek separate distributor registration.

Recommended action:

Seek IFSCA informal guidance before operational commitment.

Part 5: GIFT City PMS Compliance Requirements

Ongoing IFSCA Compliance

A GIFT City PMS must maintain:

• quarterly reporting;
• annual audit;
• KYC/AML compliance;
• valuation procedures;
• periodic client reporting;
• grievance redressal;
• net worth maintenance.

Required Appointments

A GIFT City PMS requires:

• custodian;
• fund administrator;
• auditor.

These should be appointed before launch.

SEBI Compliance for Mainland Distributor

The mainland distributor must maintain:

• valid SEBI registration;
• suitability assessment records;
• commission disclosures;
• conflict-of-interest controls.

Conclusion: The GIFT City PMS Framework Is Established — Execution Is the Key Risk

The GIFT City PMS setup framework is established and commercially viable.

The model is:

• IFSC branch for portfolio management;
• mainland distributor for client acquisition.

The practical roadmap is:

1. adopt the two-entity structure;
2. seek IFSCA guidance on open questions;
3. build genuine operational substance in GIFT City;
4. keep the structure outbound-only;
5. plan for a 9–15 month implementation cycle.

For foreign investment advisers, GIFT City offers what the mainland SEBI route cannot: a tax-efficient, regulated, globally invested discretionary PMS platform for Indian residents.

Complete Series Index — India Market Access Series: GIFT City PMS

FAQs

What is a GIFT City PMS?
A discretionary portfolio management service set up in GIFT City IFSC under International Financial Services Centres Authority regulations.

How do you set up a GIFT City PMS?
Obtain IFSCA FME registration, establish operational substance, appoint key officers, and complete compliance setup.

What is the two-entity framework?
An IFSC FME manages portfolios, while a Securities and Exchange Board of India-registered mainland distributor solicits Indian clients.

Is physical presence mandatory in GIFT City?
Yes. Genuine office presence and IFSC-based key personnel are required.

How long does it take to set up a GIFT City PMS?
Typically 9–15 months.

What is IFSCA FME registration?
Registration as a Fund Management Entity under IFSCA regulations.

What net worth is required?
USD 500,000 for Non-Retail FME; USD 1,000,000 for Retail FME.

Can Indian residents invest in GIFT City PMS?
Yes, usually through LRS and FEMA compliance.

Can GIFT City PMS invest in Indian securities?
Usually structured as outbound-only to avoid round-tripping issues.

Why is a mainland distributor needed?
To actively solicit clients in India without relying on reverse solicitation.

What are the compliance requirements?
Quarterly reporting, audits, AML/KYC, and client reporting.

Can trades be executed outside GIFT City?
Possibly, but IFSCA guidance is advisable.

Can IFSC FME directly contact Indian clients?
Likely for servicing, but formal guidance is recommended.

What are the tax benefits?
Tax holidays and potential treaty benefits may apply.

Is GIFT City PMS better than onshore SEBI PMS?
For global investing, it may offer more flexibility and tax advantages.

This article is part of the India Market Access Series published by Bhatt & Joshi Associates. It is intended for lawyers, investment professionals, and corporate officers and does not constitute legal advice.

The post How to Set Up a GIFT City PMS in 2026: IFSCA FME Registration, Compliance & Timeline appeared first on Bhatt & Joshi Associates.

India’s corporate governance framework faces a critical definitional asymmetry that directly impacts family-controlled listed companies, promoter succession planning, and the structural efficacy of private family trusts—particularly regarding the unresolved question of whether a daughter-in-law can be treated as a relatives under the SEBI Takeover Code. Under Regulation 2(1)(l) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 — commonly known as the SEBI Takeover Code or SAST Regulations — the definition of ‘immediate relative’ is confined to spouses, parents, siblings, and children. Daughters-in-law (and sons-in-law) are explicitly excluded. This exclusion creates a profound legal paradox: SEBI aggressively treats daughters-in-law as family members under the Persons Acting in Concert (PAC) framework to impose strict penal liability for disclosure lapses, while simultaneously denying them the status of ‘immediate relative’ when promoter families seek safe-harbor exemptions for transparent trust-based succession planning.

The Regulatory Paradox: ‘When it comes to punishing you for insider trading, your daughter-in-law is family; but when it comes to granting you an exemption for succession planning, she is a stranger.’ — Industry practitioners’ critique of SEBI’s inconsistent definitional framework.

This analysis examines the legislative architecture of the SAST Regulations, dissects the statutory asymmetry across Indian corporate and fiscal statutes, evaluates landmark judicial precedents, and assesses proposed reforms. It concludes that recognizing daughters-in-law as ‘relatives’ under the SEBI Takeover Code — supported by appropriate disclosure safeguards — is necessary, legally sound, and essential for modern Indian corporate governance.

 

Key Findings at a Glance 1.    Four major Indian statutes — Companies Act 2013, Income Tax Act 1961, SEBI PIT Regulations 2015 (amended Dec 2024) — explicitly recognize daughters-in-law as relatives. The SAST Regulations stand alone in their exclusion. 2.    The PAC Paradox: SEBI aggregates daughters-in-law into promoter groups for enforcement purposes but excludes them from protective exemptions — an irreconcilable regulatory contradiction. 3.    Akshar Spintex Ltd. (Dec 2024 Adjudication Order) exemplifies the penal asymmetry: promoters penalized for disclosure failure when gifting shares to daughter-in-law, despite the transfer being a bona fide family arrangement. 4.    The Supreme Court’s Balram Garg v. SEBI (2022) judgment demands concrete ‘foundational facts’ before weaponizing family ties — supporting context-specific, reality-driven approaches. 5.    Three reform pathways exist: statutory cross-reference to Companies Act 2013; trust-specific safe harbor under Regulation 10; and enhanced disclosure mechanisms.

I. Introduction: Corporate Control, Familial Evolution & Statutory Rigidity

The foundational bedrock of the Indian corporate economy remains the family-controlled enterprise. The structural evolution of India’s corporate landscape is inextricably linked to the metamorphosis of the traditional Hindu Undivided Family (HUF) into complex, multi-jurisdictional, and publicly listed conglomerates. As these family enterprises transitioned into public markets, the seamless continuity of the promoter family’s control became subject to intense regulatory scrutiny, creating enduring friction between the fluid realities of familial succession and the rigid textual boundaries of corporate law.

To insulate enterprises from succession-induced volatility, fractionalization of voting rights, and intra-family disputes, promoter groups have increasingly adopted Private Family Trusts. These sophisticated vehicles allow families to ring-fence ownership, ensure unified voting control, and construct a resilient generational framework — while maintaining the concentrated promoter holding that markets rely upon for strategic continuity.

However, these succession vehicles are critically undermined by an archaic statutory definition within India’s primary market regulation: the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations or the Takeover Code). Specifically, Regulation 2(1)(l) defines ‘immediate relative’ in a manner that conspicuously excludes the daughter-in-law — and the son-in-law — generating a compliance crisis for family-controlled listed entities.

SEBI’s Takeover Code defines ‘immediate relative’ under Regulation 2(1)(l) as: ‘…any spouse of that person, and includes parent, brother, sister, or child of such person or of the spouse.’ The daughter-in-law does not appear anywhere in this definition — despite her explicit recognition in four other Indian legal statutes.

Any transfer of shares — or the delegation of fiduciary control via trusteeship to a daughter-in-law — is treated under the strict letter of the SAST Regulations as a transfer to an unrelated third party, potentially triggering mandatory open offer obligations and severe compliance burdens. This analysis examines the full scope of this regulatory anomaly: its legislative origins, its paradoxical enforcement, its judicial treatment, and the pathway to necessary reform.

II. Statutory Anatomy of the Takeover Code & The Succession Bottleneck

A. The TRAC Genesis and Philosophy of Control

The current iteration of the SAST Regulations was fundamentally overhauled and notified in 2011, replacing the 1997 regime. This overhaul was predicated on the exhaustive recommendations of the Takeover Regulations Advisory Committee (TRAC), chaired by Mr. C. Achuthan, former Presiding Officer of the Securities Appellate Tribunal (SAT). The TRAC mandate was to align Indian acquisition norms with global M&A practices while strengthening the protective framework for retail investors.

The TRAC report altered thresholds for mandatory open offers. The core philosophy: any entity acquiring a substantial block of voting rights, or acquiring de facto or de jure control over a listed entity, must offer existing public shareholders an exit opportunity at a price equal to or higher than the acquisition price. This equality of opportunity prevents stealth takeovers and back-door accumulation of control without compensating dispersed minority shareholders.

B. Twin Triggers of Substantial Acquisition

Quantitative Trigger — Regulation 3: An initial open offer is triggered if an acquirer, together with Persons Acting in Concert (PAC), acquires shares or voting rights entitling them to exercise 25% or more of the voting capital of a target company. The ‘creeping acquisition’ limit further restricts those already holding between 25% and 75% from acquiring more than 5% in any single financial year.

Qualitative Trigger — Regulation 4: Irrespective of numerical shareholding, Regulation 4 mandates a compulsory open offer if an acquirer directly or indirectly acquires ‘control’ over the target company. Control is expansively defined under Regulation 2(1)(e) to include the right to appoint a majority of directors, or to control management or policy decisions — exercisable individually or in concert, directly or indirectly.

C. Regulation 10 Exemption: Intra-Family Safe Harbors

The architects of the Takeover Code recognized that applying rigorous open offer obligations to genuine internal family reorganizations would be commercially disastrous. When a promoter transfers shares to their child, or when a family settles equity into a private trust, the ultimate beneficial ownership and management trajectory of the listed entity do not experience a paradigm shift. Chapter II, Regulation 10(1)(a), therefore automatically exempts acquisitions pursuant to inter se transfers amongst qualifying persons — primarily ‘immediate relatives.’

In 2017, SEBI issued a master circular outlining a streamlined approval process for family trusts, permitting transfers without triggering open-offer obligations — provided trustees and beneficiaries exclusively comprised ‘immediate relatives’ as defined under Regulation 2(1)(l). It is precisely here that the definitional rigidity creates a formidable bottleneck.

D. The Daughter-in-Law Bottleneck: Recognition Among Relatives Under the SEBI Takeover Code

In modern family conglomerates, daughters-in-law frequently exercise significant fiduciary, operational, and strategic responsibilities. A patriarch seeking to settle shares into a trust for the benefit of minor grandchildren would naturally appoint his daughter-in-law — the mother of the beneficiaries and a vested stakeholder in the family’s legacy — as trustee. Yet because she falls outside Regulation 2(1)(l), she is a statutory outsider.

Practical Impact: The family is forced to abandon the automatic exemption route and file a formal application under Regulation 11 of the Takeover Code, seeking a specific, case-by-case exemption from SEBI’s regulatory panel. This process is arduous, commercially disruptive, expensive, and subjects internal succession mechanics to prolonged regulatory uncertainty — despite ultimate control remaining resolutely within the family.

III. Statutory Asymmetry: Fragmented Definition of ‘Relative’ in Indian Law

The exclusion of the daughter-in-law as a relative under the SEBI Takeover Code is not an isolated legal quirk — it is the epicenter of a regulatory anomaly resulting from uncoordinated legislative drafting across Indian corporate, fiscal, and securities statutes. The following table illustrates the profound divergence:

The Dissonance: A Split-Personality Regulator

The dissonance in the table above is not merely academic; it has severe practical ramifications. Under the Companies Act, the Ministry of Corporate Affairs acknowledges that a daughter-in-law wields enough influence to compromise the independence of a transaction — mandating strict Related Party Transaction (RPT) disclosures. Under the Income Tax Act, the Ministry of Finance recognizes that a gift to a daughter-in-law is an internal shifting of family wealth, not a taxable commercial transfer.

Most paradoxically, SEBI itself operates with a split personality. The December 2024 amendments to the Prohibition of Insider Trading (PIT) Regulations deliberately widened the dragnet of ‘connected persons’ specifically to capture daughters-in-law, based on the rationale that extended family members have access to inside information. Yet when the very same promoter family approaches SEBI under the SAST Regulations to organize a transparent succession plan — a process that promotes long-term stability and benefits minority shareholders — SEBI reverts to a hyper-literal, restrictive reading of the 2011 text, denying the familial bond.

This lack of harmonization places listed entities in impossible compliance situations. Companies drafting unified internal codes of conduct must track daughters-in-law as designated persons under PIT, while simultaneously treating those same individuals as third parties for promoter group disclosures and inter-se transfer mechanisms under the SAST Regulations. The NOCIL Limited informal guidance application to SEBI exemplifies this compliance whiplash in practice.

IV. The ‘Persons Acting in Concert’ (PAC) Paradox

The legal fiction of ‘Persons Acting in Concert’ is the most potent weapon in SEBI’s enforcement arsenal. Regulation 2(1)(q) defines PACs as persons who, with a common objective or purpose of acquiring shares or voting rights or control, cooperate through an agreement or understanding — formal or informal, direct or indirect.

Regulation 2(1)(q)(2) establishes irrefutable presumptions: certain categories of persons are automatically ‘deemed’ to be acting in concert unless the contrary is established by highly compelling evidence. Critically, promoters and members of the promoter group are deemed to be PACs. This is where the paradox crystallizes:

A. Akshar Spintex Ltd.: The PAC Paradox in Action

The adjudication order in the matter of Akshar Spintex Ltd. (Order No. Order/AN/PR/2024-25/30725-30733, December 2024) serves as the definitive case study. On December 6, 2022, promoter entities Nayan Vallabhbhai Gadhiya and Kantaben Vallabhbhai Gadhiya executed a gift deed transferring 8,50,000 equity shares to Charmee Nayan Gadhiya — wife of Nayan and daughter-in-law of Kantaben.

Because the daughter-in-law fell outside the strict SAST definition of ‘immediate relative,’ she was not formally classified as a member of the promoter group in the company’s disclosures. When shares were gifted to her, the transaction was logged as a transfer out of the promoter group, resulting in a 3.4% aggregate decrease in collective PAC shareholding — triggering mandatory disclosure requirements under Regulation 29(2) read with 29(3).

The promoters argued the lapse was a technicality: a bona fide family gift devoid of monetary consideration, with information available in the public domain via System Driven Disclosures. The SEBI Adjudicating Officer emphatically rejected this defense. Relying on SEBI v. Shriram Mutual Fund, the AO reiterated that penalty is attracted the moment a statutory contravention is established — intention or lack of ill motive is wholly irrelevant. A monetary penalty was levied on the entire promoter group.

B. Jurisprudential Consistency in Enforcement

The Akshar Spintex order is not an outlier. In Rama Steel Tubes Limited before the SAT, SEBI scrutinized the conduct of Ms. Hannya Dhir, daughter-in-law of a key entity, who resigned from her Non-Executive Directorship immediately prior to a preferential allotment — alleged to be a calculated maneuver to sever the formal corporate link and avoid PAC aggregation. In Grob Tea Co., SEBI pierced the veil of separate demat accounts, explicitly including acquisitions by daughters-in-law Smt. Ritu Mittal and Smt. Kavita Bhuwalka in the PAC aggregate, utilizing common addresses and family fund flows to establish concerted action.

The Jurisprudential Paradox: SEBI utilizes the familial relationship of the daughter-in-law to establish ‘commonality of purpose’ under the PAC framework for penal enforcement — while relying on the exclusionary definition of Regulation 2(1)(l) to deny the daughter-in-law trustee status for transparent succession planning. The regulator cannot blow hot and cold.

V. Landmark Judicial Precedents: Balram Garg v. SEBI (2022)

The intersection of family relationships, evidentiary burdens, and securities law enforcement was brought into sharp relief by the Supreme Court of India in Balram Garg v. Securities and Exchange Board of India (Civil Appeal No. 7054 of 2021, decided April 19, 2022). Though primarily dealing with PIT Regulations, its ratio decidendi has profound implications for how regulators must view familial definitions and presumptions of shared intent.

A. The PC Jeweller Dispute: Family Relationships as Evidence

SEBI alleged that Balram Garg, Managing Director of PC Jeweller Limited, unlawfully communicated Unpublished Price Sensitive Information (UPSI) regarding a proposed share buyback to his relatives. The accused ‘tippees’ included Mr. Sachin Gupta (nephew), Mrs. Shivani Gupta (wife of Sachin — a daughter-in-law of the broader promoter family), and Mr. Amit Garg (another nephew). SEBI’s Whole Time Member constructed a case based on circumstantial evidence: shared residential address, close familial ties, and trading in proximity to corporate events.

B. Supreme Court’s ‘Foundational Facts’ Doctrine

The Supreme Court, in a sweeping reversal of SAT and SEBI orders, systematically dismantled the regulator’s reliance on familial proximity as a substitute for hard evidence. The Court laid down three critical principles:

• Rejection of Guilt by Association:

An individual cannot be presumed to have shared or received UPSI solely based on being a relative or living in the same household. The existence of close family relationships, physical closeness, or shared residential proximity cannot — standing alone — be sufficient grounds to infer the communication of sensitive information or the formation of an illegal concert.

• Requirement of Foundational Facts:

To raise a legal presumption against ‘immediate relatives’ or extended family members such as a daughter-in-law, SEBI must definitively prove that relatives were ‘financially dependent’ on the insider, or that they actively ‘consulted’ the insider for their trading decisions. Without these foundational facts, the deeming fiction collapses.

• Breakdown of Ties:

The Court noted that accused members demonstrated a historical ‘breakdown of ties’ and physical separation from the Managing Director’s branch of the family, negating any automatic presumption of shared information. In the modern era, extended family units often operate with complete financial and strategic independence.

C. Implications for the SAST Regulations

While the Supreme Court demands strict, incontrovertible evidentiary proof of financial dependence to utilize family ties for penal action, SEBI’s SAST Regulations steadfastly refuse to acknowledge the legitimacy of those exact same family ties when a promoter proactively seeks a safe-harbor exemption. If a daughter-in-law is independent enough that the Supreme Court protects her from automatic insider trading presumptions, she is certainly capable of functioning as an independent fiduciary trustee for a family trust without triggering hostile takeover provisions.

The Balram Garg ruling highlights the absolute necessity for a context-specific, reality-driven approach to family relationships in corporate law — a philosophy that strongly supports the inclusion of daughters-in-law in the Takeover Code’s protective exemptions.

VI. Mechanics of Private Family Trusts & The Regulatory Bottleneck

A. The Strategic Rationale for Trust-Based Succession

In the past decade, Indian promoter families have aggressively pivoted toward trust structures as the preferred vehicle for generational wealth transfer and corporate governance continuity. Four primary motivations drive this structural shift:

• Consolidation of Voting Power:

By parking all family equity in a single trust, families ensure that voting rights are exercised as a unified block, preventing the fragmentation of control that naturally occurs when shares are distributed among dozens of heirs across multiple generations.

• Asset Protection and Ring-Fencing:

Trusts insulate the core corporate holding from personal exigencies, marital disputes, divorces, or individual bankruptcies of specific family members — ensuring the listed entity’s governance stability is decoupled from individual family member events.

• Tax and Estate Planning Optimization:

With persistent speculation about the reintroduction of estate duty in India, families have proactively structured holdings to optimize tax efficiencies and ensure smooth generational transitions with minimized compliance friction.

• Minority Shareholder Protection:

Paradoxically, well-structured family trusts actually benefit minority shareholders by preventing sudden leadership vacuums and ensuring strategic continuity under a clear, pre-defined governance framework.

B. The SEBI Exemption Mechanism and Its Structural Flaw

When a promoter transfers shares to a private trust, the legal title shifts from the individual promoter to the Trustees. Under a strict reading of Regulations 3 and 4, this constitutes an ‘acquisition’ by the trustees. SEBI’s 2017 Master Circular allows promoters to apply for exemption under Regulation 11, subject to three non-negotiable conditions:

1. The trust must be a mirror image of the promoter’s holding.
2. There must be no change in ultimate control or public shareholding.
3. The Trustees and Beneficiaries must ONLY be promoters or their ‘immediate relatives’ — as narrowly defined under Regulation 2(1)(l).

The third condition paralyzes succession planning. If a patriarch wishes to appoint his daughter-in-law as trustee — perhaps because his son is incapacitated, or to ensure she has fiduciary voice in managing the wealth her children will inherit — the application fails the automatic criteria. The family is forced into the costly Regulation 11 individual exemption process.

C. Landmark Exemption Cases: Predictable Outcomes, Avoidable Costs

In numerous precedents, SEBI has ultimately granted case-specific exemptions, implicitly acknowledging the absurdity of the rule. In PI Industries, Prince Pipes & Fittings, and Everest Kanto Cylinders, SEBI granted Regulation 11 exemptions for transfers to family trusts noting that ultimate control remained unchanged. In Shrinathji Trust (target: Shreyas Intermediates Ltd.), settlor Bal Krishna Shriya explicitly sought to include his daughter-in-law as a beneficiary — requiring the full Regulation 11 application process before obtaining an exemption SEBI was always going to grant.

In Refex Renewables & Infrastructure Limited (February 2026 Exemption Order), SEBI assessed a complex matrix of transfers where promoters sought to gift shares to grandsons and daughters-in-law, requiring multi-layered exemptions to be painstakingly justified. If the outcome of these applications is entirely predictable — SEBI invariably grants the exemption upon confirming a genuine family arrangement — then the regulatory friction added by the restrictive definition serves no constructive purpose.

The Efficiency Argument: When SEBI routinely grants Regulation 11 exemptions for daughters-in-law upon confirmation that the trust is a genuine family arrangement, the question is not whether the exemption should be granted — it is why families should be forced to endure months of regulatory uncertainty, substantial legal fees, and commercial disruption to obtain an outcome that was never genuinely in doubt.

VII. The Gender Dimension: Equity, Agency & Corporate Governance

Beyond the strictly legal mechanics of the SEBI Takeover Code, the exclusion of daughters-in-law as relatives raises profound questions concerning gender equity and the evolving role of women within Indian corporate governance. The definition of ‘immediate relative’ in the SAST Regulations is a relic of a bygone era, implicitly relying on outdated patriarchal assumptions regarding the distribution of power and fiduciary responsibility within the Indian family unit.

Historically, the structural integrity of the HUF placed decision-making authority and coparcenary rights in the hands of male lineal descendants. Daughters-in-law were structurally excluded from ownership and managerial control, viewed as passive participants in the economic life of the family. However, the modern Indian corporate landscape has undergone a radical paradigm shift.

A. Legislative Mandate for Gender Inclusion

The Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, revolutionized board compositions by mandating the appointment of female directors on boards of listed entities. While the overarching intent was to infuse boardrooms with independent gender diversity, the practical reality in family-run enterprises often resulted in the appointment of female family members — wives, daughters, and daughters-in-law — to the board. This legislative push undeniably integrated daughters-in-law into the formal, legally accountable governance structures of listed companies.

By actively excluding daughters-in-law from the definition of ‘relative’ for succession planning, the SEBI Takeover Code directly contradict this progressive legislative trajectory. Legal commentators and corporate governance experts note that this exclusion reinforces anachronistic stereotypes, effectively creating a regulatory glass ceiling.

B. The Fiduciary Agency Paradox

The State’s Contradiction: The SAST Regulations allow the State to demand that a daughter-in-law shoulder the immense regulatory liabilities of a corporate director, yet simultaneously bar her from stepping into the fiduciary role of a trustee to manage the very family wealth she helps generate and govern. This is constitutionally and morally indefensible in 2026.

In scenarios involving sudden succession crises — early mortality of male heirs, debilitating illness, or widowhood — the inability to swiftly appoint a competent daughter-in-law as trustee without triggering a hostile 25% open offer mandate places unjustified strain on enterprise continuity. The December 2024 PIT amendments themselves exemplify the evolving legislative consensus: SEBI has already widened the dragnet to recognize daughters-in-law as proximate family insiders. The Takeover Code must follow. The integration of the daughter-in-law into the protective exemptions of the SEBI Takeover Code is not merely a technical harmonization of statutes. It is a vital imperative for recognizing the equitable agency and fiduciary capacity of women in modern family business structures — consistent with India’s broader legislative trajectory toward gender equity in corporate governance.

VIII. Proposed Regulatory Reforms & Global Perspectives

In late 2025 and early 2026, the friction between the SAST Regulations and the realities of modern succession planning culminated in a high-level push by corporate India for definitive regulatory reform. A consortium of prominent business families and elite corporate law advisors formally petitioned SEBI to fundamentally overhaul the Takeover Code’s familial definitions.

A. Market Representations and Expert Advocacy

The core argument advanced by market participants is that the framework’s reliance on repeated case-specific Regulation 11 applications for standard trust setups is an unnecessary bureaucratic hurdle. Eminent legal practitioners have articulated the necessity for reform. Mr. Moin Ladha of Khaitan & Co. publicly stated that the definition ‘clearly needs a relook because in many family-owned listed companies, daughters-in-law are meaningfully involved in family governance and are often intended beneficiaries under family trusts.’ He emphasized that their exclusion in genuine non-commercial intra-family arrangements leads to ‘additional regulatory steps, avoidable uncertainty and extended timelines.’

The representations also advocate for modernization in SEBI’s view of family trust administration. Currently, SEBI guidelines actively discourage independent professional or institutional trustees alongside family members. Experts like Vishal Gada of Aurtus Consulting have noted that disallowing external professionals — especially when managing assets for minor beneficiaries — does not align with commercial realities or the evolving nature of sophisticated family offices.

B. Global Best Practices: The UK Takeover Panel

The UK Panel on Takeovers and Mergers, administering the City Code on Takeovers and Mergers, frequently updates its regulations to accommodate market realities without compromising minority protection. In February 2026, the UK Takeover Panel implemented substantive rule changes (via Response Statement 2025/1) to accommodate Dual Class Share Structures (DCSS) and to codify dispensation practices for IPOs and share buybacks under their mandatory offer regime.

International models in the UK and Singapore routinely treat family-related trusts as part of the unified promoter group. They do not place arbitrary bloodline restrictions on who can act as trustee, provided that the ultimate economic benefit and locus of family control remain anchored within the promoter group. SEBI must adopt a similarly principles-based, globally aligned approach.

C. Three Viable Reform Pathways

Pathway 1 — Statutory Cross-Reference (Recommended): The most elegant solution is amending Regulation 2(1)(l) of the SAST Regulations to substitute ‘immediate relative’ with a direct reference to the definition of ‘relative’ under Section 2(77) of the Companies Act, 2013. This single amendment would instantly expand the protective umbrella to include daughters-in-law, sons-in-law, and HUF members, ensuring absolute consistency across India’s primary corporate statutes.

Pathway 2 — Trust-Specific Safe Harbor: If SEBI is hesitant to globally expand the definition for all inter se transfers, it could carve out a ring-fenced exemption under Regulation 10 exclusively for Private Family Trusts. This safe harbor would explicitly permit the transfer of shares to a trust where daughters-in-law serve as trustees, subject to codified conditions: absence of commercial consideration, beneficiaries being lineal descendants, and the trust deed prohibiting transfer of voting control to third parties outside the promoter group.

Pathway 3 — Enhanced Disclosure Mechanisms: The inclusion of daughters-in-law could be coupled with enhanced, continuous disclosure mandates — requiring target companies to publish the foundational tenets of the trust deed, the identities of all trustees, and the operational mechanics of the family trust directly to the stock exchanges. This ensures total, ongoing transparency for retail and institutional investors regarding the true locus of corporate control.

Under SEBI Chairman Tuhin Kanta Pandey’s leadership, the Board is evaluating broader M&A reforms in 2026 — including proposals to mandate independent valuations for infrequently traded shares and expedite open offer timelines to 30 days. The daughter-in-law recognition reform should be integrated into this comprehensive legislative overhaul.

IX. Conclusion: Towards a Harmonized, Equitable Regulatory Framework

The current exclusion of the daughter-in-law from the definition of ‘immediate relative’ under the SEBI SAST Regulations 2011 stands as a glaring, indefensible anomaly in the modern Indian legal framework. The issue assumes particular significance in determining whether a daughter-in-law qualifies as a relative for the purposes of the SEBI Takeover Code. It creates an untenable paradigm where the securities regulator aggressively aggregates the daughter-in-law into the promoter group to penalize disclosure lapses under the strict liability doctrine of PAC, while simultaneously treating her as an absolute stranger to deny safe-harbor exemptions necessary for transparent, trust-based succession planning.

This asymmetry flatly contradicts the inclusive definitions enshrined within the Companies Act, 2013, and the Income Tax Act, 1961. It stands at stark odds with SEBI’s own recent expansive amendments to the PIT Regulations in December 2024. Furthermore, it reinforces archaic gender norms that fail to recognize the substantive fiduciary roles that women currently occupy in the governance of family-controlled enterprises.

As Indian corporate families increasingly rely on sophisticated trust structures to ensure generational continuity and insulate listed enterprises from succession volatility, the regulatory framework must evolve to support — rather than hinder — this professionalization of family wealth management. By enacting a carefully calibrated amendment recognizing the daughter-in-law as a relative — supported by stringent structural safeguards, continuous disclosure norms, and a principles-based approach to trust governance — SEBI can dismantle an unnecessary bureaucratic bottleneck.

Such reform will not compromise the sanctity of the mandatory open offer mechanism, nor will it dilute vital minority shareholder protection. Rather, it will facilitate seamless, legally sound succession planning — ensuring the long-term stability, strategic continuity, and sustainable growth of India’s foundational corporate institutions.

References

1 SEBI SAST Regulations, 2011 — Reg 2(1)(l), 2(1)(q), 3, 4, 10, 11www.sebi.gov.in/legal/regulations/oct-2011/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-regulations-2011_10933.html

2 TRAC Report (Achuthan Committee), 2010 — PIB Notificationwww.pib.gov.in/newsite/PrintRelease.aspx?relid=65400

3 Companies Act, 2013 — Section 2(77) r/w Rule 4 (MCA)ca2013.com/section-277-relative/

4 Income Tax Act, 1961 — Section 56(2)(x) — CBDT / MoFPrimary legislation — available on official statute database

5 SEBI PIT Regulations, 2015 as amended December 2024www.sebi.gov.in/legal/regulations/jan-2015/sebi-prohibition-of-insider-trading-regulations-2015_27508.html

6 Balram Garg v. SEBI — Civil Appeal No. 7054 of 2021 (SC, 19 April 2022)api.sci.gov.in/supremecourt/2021/26746/26746_2021_9_1501_35070_Judgement_19-Apr-2022.pdf

7 SEBI v. Shriram Mutual Fund — 68 SCL 216 (SC) — Strict LiabilityPrimary legislation — available on official statute database

8 Order in the matter of Rama Steel Tubes Limited — SATwww.casemine.com/judgement/in/6149a186342cca13b3206acb

9  Grob Tea Co. Adjudication Order — SEBIwww.sebi.gov.in/adjorder/grob.html

10 Akshar Spintex Ltd. — Order/AN/PR/2024-25/30725-30733 (Dec 2024)bsmedia.business-standard.com/_media/bs/data/announcements/bse/09122024/8782e50e-8e92-47e9-8953-ca888dcb61d1.pdf

11 Refex Renewables & Infrastructure Ltd. — WTM/KCV/CFD/21/2025-26 (Feb 2026)www.sebi.gov.in/sebi_data/attachdocs/feb-2026/exemption_order_refexren.pdf

The post SEBI Daughters-in-Law as ‘Relatives’ Under Takeover Code: Proposed Amendment Analysis appeared first on Bhatt & Joshi Associates.

Introduction

The Securities and Exchange Board of India (SEBI) has introduced a transformative regulatory framework through the SEBI (Alternative Investment Funds) (Second Amendment) Regulations 2025, which marks a significant evolution in India’s alternative investment ecosystem. This amendment introduces SEBI co-investment schemes within the Alternative Investment Funds (AIFs) framework, creating new opportunities for investors while maintaining robust regulatory oversight. The development represents a carefully calibrated approach to enhance market efficiency while protecting investor interests, a balance that has defined SEBI’s regulatory philosophy since its inception.

Understanding the Alternative Investment Funds Regulatory Framework

The journey of alternative investments in India began with the SEBI (Alternative Investment Funds) Regulations 2012, which came into force on May 21, 2012 [1]. These regulations replaced the earlier SEBI (Venture Capital Funds) Regulations 1996, creating a unified regulatory framework for all non-traditional investment vehicles. The 2012 regulations established AIFs as privately pooled investment vehicles that collect funds from investors, whether Indian or foreign, for investing according to a defined investment policy for the benefit of their investors.

The regulatory framework divides AIFs into three distinct categories, each serving different investment objectives and risk profiles. Category I AIFs include venture capital funds, infrastructure funds, social venture funds, and SME funds, which invest in start-ups, early-stage ventures, social enterprises, and infrastructure sectors. These funds receive certain incentives from the government due to their positive impact on the economy and employment generation. Category II AIFs encompass private equity funds, debt funds, and fund of funds that do not fall under Category I or Category III, operating without leverage except for meeting day-to-day operational requirements. Category III AIFs employ diverse or complex trading strategies and may use leverage, including hedge funds and trading-oriented funds.

The regulatory architecture established in 2012 set minimum investment requirements, disclosure obligations, and operational guidelines that have shaped the growth trajectory of India’s alternative investment sector. Over the years, SEBI has demonstrated a dynamic approach to regulation, periodically amending these rules to address emerging market needs while maintaining investor protection standards.

The Genesis of Co-Investment Schemes 

Prior to the 2025 amendment, co-investment arrangements existed in a limited form through the Centralized Portfolio Management System (CPMS) route, which allowed portfolio managers to facilitate co-investments [2]. However, this mechanism had inherent limitations that restricted its utility for both fund managers and investors. The existing framework lacked clarity on governance structures, operational procedures, and regulatory compliance requirements specific to co-investment arrangements.

Co-investment, in its fundamental essence, represents an arrangement where investors in an AIF participate directly in specific investment opportunities alongside the main fund. This structure offers several advantages including enhanced capital deployment flexibility, reduced fee burden for investors on co-invested amounts, and improved alignment of interests between fund managers and investors. However, the absence of explicit regulatory recognition created uncertainty around permissibility, documentation requirements, and compliance obligations.

The introduction of dedicated co-investment schemes through the 2025 amendment addresses these gaps systematically. Under the amended regulations, co-investment is formally defined as investments made by managers, sponsors, or investors of Category I or Category II AIFs in unlisted securities of investee companies where the fund also makes investments [3]. This definition brings clarity to what constitutes permissible co-investment activity and establishes boundaries for regulatory oversight.

Key Features of the New Co-Investment Framework

The amended regulations introduce several critical features that define the operational contours of co-investment schemes under SEBI. The framework restricts participation to accredited investors of Category I and Category II AIFs, ensuring that only sophisticated investors who understand the risks and complexities of such arrangements can participate. This restriction aligns with SEBI’s broader philosophy of graduated investor protection based on investor sophistication and financial capacity.

Each co-investment scheme is permitted to invest in only one investee company, a restriction designed to maintain transparency and avoid commingling of investments across multiple opportunities. This single-company limitation ensures that investors have complete clarity about where their co-investment capital is deployed and can make informed decisions based on the specific merits of each investment opportunity. The scheme cannot invest in units of other AIFs, maintaining a clear separation between primary fund investments and co-investment arrangements.

The shelf placement memorandum emerges as the cornerstone document for co-investment schemes [4]. This memorandum must contain principal terms relating to co-investments, including the governance structure, regulatory framework, investment strategy, and risk factors. The document serves as the primary disclosure mechanism through which fund managers communicate the essential features of the co-investment opportunity to potential participants. The memorandum approach provides flexibility while ensuring adequate disclosure, allowing managers to structure co-investment opportunities efficiently without repetitive documentation requirements for each specific opportunity.

Governance and Operational Requirements

The governance architecture established by the regulations ensures proper segregation and management of co-investment schemes. Each scheme must maintain separate bank accounts and demat accounts, creating a clear financial and securities holding separation from the parent AIF and other schemes [5]. This segregation serves multiple purposes including facilitating accurate accounting, preventing commingling of assets, and enabling clear audit trails for regulatory compliance and investor reporting.

The concept of ring-fencing assumes particular importance in the co-investment context. All assets held under a co-investment scheme remain insulated from the assets of other schemes and the parent fund. This legal and operational separation protects co-investors from risks associated with other schemes or the parent fund’s portfolio, ensuring that each co-investment stands on its own merits and risks. The ring-fencing also simplifies exit and liquidation processes, as each scheme’s assets can be dealt with independently.

Investment limits form another crucial aspect of the governance framework. The regulations stipulate that co-investment in an investee company cannot exceed three times the contribution of an investor in that company, unless the co-investment is made through specific financial institutions [6]. This provision prevents excessive concentration and ensures that co-investment remains supplementary to the main fund’s investment rather than becoming the primary deployment mechanism. The three-times limit balances the objectives of providing flexibility for larger co-investment tickets while preventing potential abuse or excessive concentration risks.

Compliance and Regulatory Safeguards

The regulatory framework incorporates several compliance requirements designed to prevent circumvention of securities laws and maintain market integrity. Fund managers bear the responsibility of ensuring that investors do not hold stakes indirectly through co-investment that they would be prohibited from holding directly. This provision addresses potential regulatory arbitrage where investors might use the co-investment structure to bypass direct investment restrictions or limitations applicable to them under other regulations.

The regulations also mandate that managers ensure no investment is made through co-investment schemes that would trigger additional disclosure requirements if made directly by the investor. This requirement maintains the integrity of disclosure regimes under various securities laws and prevents the co-investment structure from becoming a mechanism to avoid transparency obligations. For instance, if an investor’s direct investment would trigger public shareholding disclosure requirements under takeover regulations, the co-investment route cannot be used to circumvent such requirements.

An important safeguard addresses the prevention of fund flow from prohibited sources. The regulations require managers to ensure that no investee company receives funds from an investor who is otherwise restricted or prohibited from making such investments [7]. This provision is particularly relevant in the context of foreign investment regulations, where certain sectors have restrictions on the nature and source of investments. The co-investment structure cannot become a conduit for circumventing such sectoral restrictions or source-based limitations.

Cost Sharing and Economic Arrangements

The treatment of expenses associated with co-investment arrangements reflects principles of fairness and proportionality. The regulations mandate that expenses incurred in making co-investments must be shared proportionately between the AIF and the co-investment scheme based on the ratio of their respective investments [8]. This provision ensures that neither the main fund investors nor the co-investors bear a disproportionate expense burden relative to their investment quantum.

The expense-sharing mechanism addresses a practical challenge that has characterized co-investment arrangements globally. Deal sourcing, due diligence, legal documentation, and transaction execution involve significant costs. The proportionate sharing principle ensures that these costs are allocated fairly, preventing situations where either party subsidizes the other’s investment. This clarity on cost allocation enhances transparency and reduces potential disputes between fund managers, main fund investors, and co-investors.

The regulations leave certain aspects of economic arrangements to contractual negotiations between parties, subject to disclosure in the shelf placement memorandum. These include carry arrangements, management fee structures for co-investment schemes, and preferred return mechanisms. This flexibility allows fund managers to structure economically viable co-investment opportunities while ensuring full disclosure to participants.

Penalties and Enforcement Mechanisms

The regulatory framework incorporates penalty provisions to ensure compliance and deter potential violations. A significant provision addresses investor defaults in contribution commitments. Where an investor has defaulted on their contribution obligation, that investor is barred from participating in co-investment in the relevant investee company [9]. This penalty serves as a strong deterrent against commitment defaults while protecting the interests of other investors and the investee company who rely on committed capital being deployed as agreed.

The default penalty reflects broader principles of commercial discipline and contract sanctity. Co-investment arrangements involve commitments to deploy capital at specified times or upon occurrence of specified conditions. Default by one investor can impact the entire investment structure, potentially causing losses to the fund, other investors, and the investee company. The exclusion penalty ensures that defaulting investors cannot enjoy the benefits of co-investment opportunities while failing to honor their obligations.

Beyond the specific default penalty, co-investment schemes remain subject to SEBI’s broader enforcement framework under the AIF Regulations. This includes adjudication and penalty provisions for various violations, consent mechanisms for settling proceedings, and appellate procedures. Fund managers operating co-investment schemes must ensure compliance not only with the specific co-investment provisions but also with general AIF obligations regarding registration, reporting, disclosure, and conduct standards.

Regulatory Evolution and Market Development

The introduction of co-investment schemes represents part of SEBI’s broader strategy to develop alternative investment markets in India while maintaining appropriate regulatory safeguards. The alternative investment sector has grown substantially since 2012, with assets under management increasing from modest levels to becoming a significant component of India’s financial landscape. This growth has been accompanied by increasing sophistication among investors, fund managers, and investee companies, creating conditions conducive to more flexible investment structures like co-investments.

SEBI’s approach to introducing co-investment schemes demonstrates regulatory pragmatism. Rather than imposing rigid structures, the regulations establish broad principles and essential safeguards while allowing flexibility in operational details. The shelf placement memorandum approach, in particular, exemplifies this balance between regulatory oversight and operational flexibility. Fund managers can structure schemes to meet specific opportunity requirements while ensuring adequate disclosure and investor protection.

The timing of the co-investment framework introduction aligns with several market developments. Increasing deal sizes in private equity and venture capital transactions often strain individual fund capacities, making co-investment attractive for deploying larger tickets. Growing investor sophistication has created demand for more flexible participation options beyond traditional fund structures. The success of co-investment arrangements in mature markets like the United States and Europe has demonstrated the viability and benefits of such structures, providing a template that Indian regulations have adapted to local conditions.

International Comparisons and Best Practices

While India’s co-investment framework is tailored to local market conditions and regulatory philosophy, examining international approaches provides useful context. In the United States, co-investment arrangements have become standard practice in private equity and venture capital, governed primarily by contractual arrangements between fund managers and investors, with regulatory oversight focused on ensuring adequate disclosure and preventing conflicts of interest. The Securities and Exchange Commission has provided guidance on when co-investment opportunities must be offered to all investors versus when they can be selectively offered based on investor capacity and interest.

European markets have seen co-investment structures flourish under the Alternative Investment Fund Managers Directive (AIFMD) framework, which establishes broad principles for investor protection while leaving operational details to member state implementation and contractual arrangements. The European approach emphasizes disclosure, conflict management, and ensuring fair treatment of all investors, principles that resonate with SEBI’s framework.

Singapore’s co-investment landscape operates under the regulatory oversight of the Monetary Authority of Singapore, which has adopted a principles-based approach similar to India’s current framework. The emphasis on accredited investor participation, adequate disclosure, and alignment of interests characterizes Singapore’s approach, reflecting recognition that sophisticated investors can evaluate and assume the risks associated with co-investment structures.

Implications for Fund Managers

For fund managers, the new co-investment framework presents both opportunities and operational challenges. The ability to offer co-investment opportunities enhances fundraising prospects, as many institutional investors actively seek such opportunities to deploy larger capital amounts in attractive opportunities while managing overall fund concentration. Co-investment capabilities have become a competitive differentiator among fund managers, and the regulatory clarity provided by the 2025 amendment enables Indian managers to compete more effectively with international peers.

However, implementing co-investment schemes under SEBI requires significant operational infrastructure. Fund managers must establish processes for identifying appropriate co-investment opportunities, marketing these to qualified investors, managing the shelf placement memorandum disclosure process, maintaining separate accounting and reporting systems for each scheme, and ensuring compliance with all regulatory requirements including the restrictions on indirect holdings and disclosure triggering. The requirement to ensure proportionate expense allocation adds complexity to financial management systems.

The governance responsibilities imposed on managers under the co-investment framework are substantial. Managers must actively monitor to ensure that co-investment structures are not used to circumvent applicable regulations, that investors honor their commitments, and that all disclosure obligations are met. These responsibilities create potential liability exposure that managers must carefully manage through robust compliance systems, appropriate insurance coverage, and clear contractual terms with investors.

Impact on Investors

For investors, particularly institutional investors like pension funds, insurance companies, and endowments, the formalization of co-investment schemes offers significant advantages. Co-investment opportunities enable larger deployment in attractive opportunities without the concentration risks associated with investing more in the main fund. The ability to selectively participate in specific opportunities allows investors to apply their own investment judgment and sector expertise to individual deals.

The fee advantages of co-investment are particularly attractive. Typically, co-investments are made without paying management fees or carried interest on the co-invested amount, or with reduced fees compared to main fund investments. Over the lifetime of investments, these fee savings can substantially enhance net returns to investors. For large institutional investors managing billions in assets, even modest fee reductions translate into significant absolute savings.

However, co-investment also requires investors to develop capabilities for evaluating individual opportunities, often within compressed timeframes. Unlike main fund investments where the fund manager conducts diligence and makes investment decisions, co-investment requires investors to independently assess opportunities and make timely commitment decisions. This necessity has led many institutional investors to build dedicated co-investment evaluation teams with sector expertise and deal execution capabilities.

Future Directions and Potential Refinements

As the co-investment framework becomes operational and market participants gain experience with its provisions, several areas may warrant future regulatory attention. The restriction limiting each scheme to one investee company, while providing clarity and transparency, may prove operationally cumbersome if investors wish to make multiple co-investments alongside the same fund. Future refinements might consider allowing schemes to invest in multiple companies while maintaining appropriate segregation and disclosure mechanisms.

The three-times investment limit, though designed to prevent excessive concentration, may be restrictive in certain circumstances where investee companies require larger capital infusions and investors have both the capacity and willingness to deploy more significant amounts. Regulatory consideration of higher limits under specified conditions or for certain categories of investors might enhance the framework’s flexibility without compromising its protective objectives.

The expense allocation methodology, while establishing the principle of proportionate sharing, leaves several practical implementation questions that may benefit from further guidance. Questions around allocation of expenses that benefit both main fund and co-investment differently, treatment of aborted transaction costs, and timing of expense recognition could be addressed through illustrative examples or clarificatory circulars as practical experience accumulates.

Conclusion

The introduction of co-investment schemes under the SEBI (Alternative Investment Funds) (Second Amendment) Regulations 2025 represents a significant advancement in India’s alternative investment regulatory framework. By providing explicit recognition and a structured framework for co-investment arrangements, SEBI has addressed a market need while maintaining robust investor protection standards. The framework balances flexibility in structuring arrangements with essential safeguards around governance, disclosure, and compliance.

The success of this initiative will depend on effective implementation by fund managers and constructive participation by investors. As market participants gain experience with the framework, best practices will emerge that enhance the efficiency and attractiveness of co-investment opportunities. Regulatory monitoring and periodic refinements based on practical experience will ensure that the framework continues serving its objectives of promoting market development while protecting investor interests.

For India’s alternative investment ecosystem, the co-investment framework opens new possibilities for capital deployment, investor engagement, and deal structuring. As the market matures and participants leverage these opportunities, co-investment has the potential to become a standard feature of alternative investment transactions, contributing to the depth and sophistication of India’s capital markets. The regulatory clarity provided by the 2025 amendment establishes the foundation for this evolution, positioning India’s alternative investment sector for continued growth and development.

References

[1] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. Available at: https://www.sebi.gov.in/legal/regulations/aug-2024/securities-and-exchange-board-of-india-alternative-investment-funds-regulations-2012-last-amended-on-august-06-2024-_85618.html 

[2] Vinod Kothari Consultants. (2025). CIV-ilizing Co-investments: SEBI’s new framework for Co-investments under AIF Regulations. Available at: https://vinodkothari.com/2025/09/civ-ilizing-co-investments/ 

[3] TaxGuru. (2025). SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025. Available at: https://taxguru.in/sebi/sebi-alternative-investment-funds-second-amendment-regulations-2025.html 

[4] Cyril Amarchand Mangaldas. (2025). Beyond CPMS Route: SEBI Unlocks Co-Investment Schemes for AIFs. India Corporate Law. Available at: https://corporate.cyrilamarchandblogs.com/2025/09/beyond-cpms-route-sebi-unlocks-co-investment-schemes-for-aifs/ 

[5] StudyCafe. (2025). SEBI Notifies Second Amendment to AIF Regulations, 2025: Introduction of Co-Investment Schemes. Available at: https://studycafe.in/sebi-notifies-second-amendment-to-aif-regulations-2025-introduction-of-co-investment-schemes-392931.html 

[6] TaxScan. (2025). SEBI Notifies Amendments to Alternative Investment Funds Regulations, 2012. Available at: https://www.taxscan.in/top-stories/sebi-notifies-amendments-to-alternative-investment-funds-regulations-1432258 

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Introduction

The Securities and Exchange Board of India (SEBI) enacted the Registrars to an Issue and Share Transfer Agents (RTAs) Regulations in 1993 to establish a comprehensive regulatory framework for entities that maintain records of security holders and process security transfers in India’s capital markets. These regulations recognized the critical infrastructure role played by RTAs in maintaining accurate ownership records, facilitating seamless transfers, and providing essential services to both issuers and investors. As the primary intermediaries responsible for processing investor applications during public offerings and maintaining ongoing investor records post-listing, RTAs represent a fundamental component of market infrastructure that directly impacts investor experience and confidence. By creating a structured regulatory regime through the SEBI RTAs Regulations, 1993, SEBI aimed to enhance operational standards, improve investor service quality, and strengthen the integrity of securities ownership records, thereby supporting the broader objectives of investor protection and market development.

Historical Context and Legislative Evolution of SEBI RTAs Regulations

The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations emerged during the early formative years of India’s securities market reforms. Prior to these regulations, the functions of registrars and transfer agents were performed without specialized regulatory oversight, often by in-house issuer departments or unregulated service providers. This created significant inconsistencies in service standards, operational practices, and investor experiences across different securities.

The SEBI RTAs Regulations, 1993, were promulgated under Section 30 of the SEBI Act, 1992, which empowers SEBI to make regulations consistent with the Act. Their introduction coincided with a period of fundamental transformation in India’s capital markets, including the establishment of the National Stock Exchange in 1992, reforms in the primary market issuance process, and initial steps toward the dematerialization of securities.

Over the decades, these regulations have undergone significant evolution to adapt to changing market conditions and technological developments:

1. The original SEBI RTAs Regulations 1993 established the basic registration framework and operational standards for RTAs in a predominantly paper-based securities market.
2. The 1998 amendments updated requirements to reflect the introduction of depositories and the beginning of dematerialization under the Depositories Act, 1996.
3. The 2006 revisions strengthened the governance framework and enhanced investor service requirements.
4. The 2011 amendments updated capital adequacy requirements and modernized operational standards.
5. The 2018 revisions further strengthened investor protection mechanisms and enhanced disclosure requirements.
   

The most transformative influence on the RTA regulatory framework has been the transition from physical certificates to electronic holdings. When the regulations were first introduced, securities existed primarily in physical form, with transfer requiring physical movement of certificates, signature verification, and manual register updates. The subsequent dematerialization of securities fundamentally altered the operational landscape for RTAs, shifting their focus from physical certificate handling toward electronic record management, depository interfaces, and digital investor services.

Registration Requirements and Eligibility for RTAs under SEBI Regulations

Chapter II: Registration Framework

Chapter II of the SEBI RTAs Regulations 1993 sets out the registration requirements. Regulation 3 states:

“No person shall act as registrar to an issue or share transfer agent unless he has obtained a certificate of registration from the Board under these regulations:

Provided that a person acting as registrar to an issue or share transfer agent immediately before the commencement of these regulations may continue to do so for a period of three months from such commencement or, if he has made an application for such registration within the said period of three months, till the disposal of such application.”

The regulations create two distinct categories of registration:

1. Category I: Entities authorized to carry on activities as both registrar to an issue and share transfer agent
2. Category II: Entities authorized to carry on activity either as registrar to an issue or as share transfer agent

This distinction reflects the different operational capabilities, capital requirements, and expertise needed for the full range of services versus more specialized functions.

Eligibility Criteria for SEBI Registration of RTAs

Regulation 6 outlines comprehensive eligibility criteria for registration:

“The Board shall not grant a certificate of registration under regulation 6 unless the applicant satisfies the following conditions, namely:— (a) the applicant is a body corporate; (b) the applicant has the necessary infrastructure, including adequate office space, equipment and manpower to effectively discharge his activities; (c) the applicant has qualified personnel to carry out the responsibilities as registrar to an issue or share transfer agent, as the case may be; (d) any of its director, has not at any time been convicted for an offence involving moral turpitude or any economic offence; (e) the applicant has not at any time been guilty of violations of provisions of any Act, and rules or regulations made thereunder, designed to protect the interests of investors in securities; (f) the applicant fulfils the capital adequacy requirements specified in regulation 7; (g) the applicant has professional qualification from an institution recognized by the Government in finance, accountancy, law or business management; (h) the applicant has considerable experience in handling the work of registrar to an issue or share transfer agent as the case may be; (i) the grant of certificate to the applicant is in the interest of investors; and (j) the applicant is a fit and proper person.”

The capital adequacy requirements specified in Regulation 7 establish minimum net worth thresholds:

• For Category I: Not less than Rs. 50 lakhs (Rs. 5 million)
• For Category II: Not less than Rs. 25 lakhs (Rs. 2.5 million)

These financial requirements ensure that RTAs have sufficient capital to invest in necessary infrastructure, maintain operational capabilities, and absorb potential liabilities arising from operational errors.

RTAs Application and Registration Process under SEBI Regulations

Regulations 4-8 establish a comprehensive application and evaluation process:

1. Detailed application containing information about organizational structure, technological infrastructure, and operational experience
2. Due diligence of key personnel to ensure no history of market violations or financial misconduct
3. Assessment of operational capabilities, particularly regarding record-keeping and investor service systems
4. Evaluation of technological infrastructure and disaster recovery mechanisms
5. Review of internal control systems and oversight procedures

Upon successful evaluation, SEBI grants a certificate of registration, typically valid for five years and subject to renewal. This structured evaluation process ensures that only qualified entities with appropriate resources and expertise can function as RTAs.

Core Duties and Compliance of RTAs under SEBI Regulations

Chapter III: Core Duties under Chapter III of SEBI RTA Regulations

Chapter III of the SEBI RTAs Regulations, 1993 establishes fundamental obligations for RTAs. Regulation 12 mandates:

“(1) Every registrar to an issue and share transfer agent holding a certificate shall, besides fulfilling the terms and conditions contained in regulations 6 and 7, abide by the code of conduct as specified in Schedule III. (2) Every registrar to an issue and share transfer agent shall maintain appropriate records relating to their activities and proper books of account, records and documents, etc.”

This provision establishes both adherence to the code of conduct and maintenance of proper records as foundational obligations for RTAs.

Record Maintenance Obligations under Regulation 13

Regulation 13 establishes detailed record-keeping requirements:

“(1) Every registrar to an issue shall maintain the following records with respect to: (a) all the applications received from investors in respect of an issue; (b) all rejected applications, specifying the reasons for rejections; (c) basis of allotment; (d) terms and conditions of purchase of securities; (e) allotment of securities; (f) list of allottees and non-allottees; (g) refund orders; (h) such other records as may be specified by the Board for carrying on the activities as registrar to an issue.

(2) Every share transfer agent shall maintain the following records with respect to: (a) all the transfers effected; (b) the number of transfers pending for more than 10 days, and the reasons for such pendency; (c) certificates issued, including duplicate certificates; (d) split of certificates; (e) records of the meetings of the transfer committee, if any; (f) correspondence with the investors and the bodies corporate; (g) correspondence with the stock exchanges; (h) such other records as may be specified by the Board for carrying on the activities as share transfer agent.”

These comprehensive record-keeping requirements ensure that RTAs maintain complete and accurate documentation of all their activities, creating an audit trail that enables regulatory oversight and investigation when needed.

Mandated Client Agreements under Regulation 13A

Regulation 13A, introduced in subsequent amendments, requires a written agreement with clients:

“Every registrar to an issue and share transfer agent shall enter into a legally binding agreement with the issuer, setting out their mutual rights, liabilities and obligations relating to such activities and in accordance with the provisions of the depositories act, regulations and bye-laws.”

This requirement ensures clarity regarding the respective responsibilities of the RTA and the issuer, preventing gaps in accountability that could affect investor service quality.

Code of Conduct for RTAs under SEBI Regulations

Schedule III contains a detailed code of conduct for RTAs. Key provisions include:

1. Maintaining high standards of integrity, dignity, and fairness in all dealings
2. Exercising due diligence and reasonable care in all operations
3. Maintaining appropriate confidentiality of client and investor information
4. Avoiding conflicts of interest that could compromise service quality
5. Ensuring timely and accurate processing of investor requests
6. Cooperating with regulatory authorities and other market participants

These ethical standards complement the operational requirements, creating a comprehensive framework for RTA behavior.

Key Judicial Interpretations on SEBI Regulations Governing RTAs

Karvy Computershare v. SEBI (2017)

This SAT appeal addressed record-keeping standards for RTAs. Karvy Computershare had challenged SEBI’s order regarding deficiencies in maintaining investor records. The tribunal’s judgment established:

“The record-keeping obligation of RTAs under Regulation 13 is not merely procedural but substantive, reflecting the fundamental role of these entities as repositories of ownership information in the securities market. Accurate and comprehensive record-keeping is essential not merely for regulatory compliance but for protecting the substantive property rights of investors in their securities.

The required standard for record-keeping encompasses not merely retention of information but active maintenance ensuring accessibility, accuracy, and completeness. In a hybrid market with both physical and dematerialized securities, records must establish clear audit trails across both formats, with particular attention to reconciliation between physical certificates and electronic holdings.

While the regulations predated comprehensive digitization, they must be interpreted purposively to require evolution of record-keeping standards with technological capabilities. As technological possibilities for secure, accessible record-keeping expand, the standard of care expected from RTAs similarly evolves, requiring appropriate investment in systems and processes.”

This judgment established that the record-keeping obligation is a dynamic standard that evolves with technological capabilities, rather than a static compliance requirement.

Link Intime India v. SEBI (2019)

This case focused on corporate action processing standards. Link Intime had challenged SEBI’s interpretation regarding its responsibilities in processing dividend payments. The SAT judgment noted:

“The RTA’s responsibility in processing corporate actions extends beyond mere mechanical execution of issuer instructions to include appropriate verification, validation, and investor protection considerations. When facilitating dividend distributions, bonus issuances, or other corporate actions, the RTA functions not merely as the issuer’s agent but as a market infrastructure provider with independent obligations to investors.

These obligations include: (a) maintaining appropriate reconciliation of investor records to ensure corporate action benefits reach all eligible investors; (b) implementing verification mechanisms to prevent processing errors; (c) establishing appropriate notification systems to inform investors about corporate actions; (d) maintaining audit trails of all corporate action processing steps; and (e) implementing investor grievance mechanisms specifically addressing corporate action issues.

The timeliness standard for corporate action processing must be interpreted in light of both technological capabilities and investor protection needs. As processing technologies improve, the acceptable timeframe for completing corporate actions correspondingly contracts, requiring RTAs to continually upgrade their technological capabilities.”

This judgment emphasized the RTA’s substantive responsibilities in corporate action processing and the evolution of service standards with technological capabilities.

KFin Technologies v. SEBI (2020)

This case addressed digital transformation requirements for RTAs. KFin had sought clarification regarding SEBI’s expectations for technology adoption. The tribunal held:

“The regulatory framework for RTAs, while originally conceived in a paper-based environment, must be interpreted purposively to require appropriate technological adaptation as market infrastructure evolves. The obligation to maintain ‘appropriate records’ under Regulation 13 implicitly requires adoption of contemporary record-keeping technologies that enhance accuracy, security, and accessibility.

In the contemporary context, appropriate technological infrastructure for RTAs includes: (a) comprehensive digitization of investor records with appropriate backup and recovery mechanisms; (b) secure digital interfaces with depositories, stock exchanges, and issuer systems; (c) automated reconciliation processes to ensure consistency across different record formats; (d) digital communication channels for investor services with appropriate security measures; and (e) robust cybersecurity frameworks to protect investor data integrity.

While the regulations do not mandate specific technologies, they establish a principles-based obligation to maintain infrastructure aligned with evolving market standards and investor service expectations. This requires regular technology assessment and appropriate investment in systems upgrading.”

This judgment clarified the implicit technological evolution requirements within the regulatory framework, establishing that contemporary standards rather than original 1993 capabilities determine compliance expectations.

Operational and Technological Evolution of RTAs

The RTA function has undergone dramatic transformation since the SEBI RTAs Regulations 1993 were introduced, particularly due to dematerialization and technological advancement:

Dematerialization Impact

The transition from physical certificates to electronic holdings fundamentally transformed RTA operations:

1. Initial Phase (1996-2003): During this transitional period, RTAs managed dual systems handling both physical certificates and dematerialization requests. Their role included verification of physical certificates for dematerialization, coordination with depositories, and maintenance of parallel record systems.
2. Middle Phase (2004-2010): As dematerialization progressed, RTAs shifted focus toward managing interfaces between issuers, depositories, and investors. While physical certificates remained significant for certain investor segments, electronic holdings became dominant in trading volumes.
3. Contemporary Phase (2011-present): Physical certificates now represent a minority of holdings, with RTAs primarily managing electronic records. However, they continue to handle residual physical certificates, particularly for smaller investors, estates, and disputed holdings.
   

This transformation required substantial investment in new technological systems, development of depository interfaces, and fundamental reorientation of operational processes from paper handling toward electronic data management.

Technological Evolution

RTA operations have been revolutionized by technological advancement:

1. Database Management: From paper registers to sophisticated database systems tracking ownership, transfers, and corporate actions.
2. Web Portals: Development of online investor service platforms allowing electronic submission of requests, status tracking, and document downloads.
3. Mobile Applications: Creation of smartphone applications enabling investors to access services, track holdings, and submit requests through mobile devices.
4. Process Automation: Implementation of automated workflows for transfer processing, investor communications, and corporate action execution.
5. Artificial Intelligence: Emerging applications of AI for anomaly detection, fraud prevention, and enhanced investor service through chatbots and automated communication systems.
   

This technological evolution has been both driven by and reflected in regulatory expectations, with SEBI progressively raising standards for digital transformation through circulars, guidelines, and enforcement actions.

Market Structure Development 

The RTA landscape has evolved significantly since the SEBI RTAs Regulations 1993 were introduced:

1. Consolidation: The market has consolidated from numerous small players to a handful of dominant entities, with the top three RTAs (KFin Technologies, Link Intime, and CAMS) serving the majority of listed companies.
2. Specialization: Some RTAs have developed specialized focus on particular issuer categories or investor segments, including mutual funds, alternative investment funds, and international offerings.
3. Service Expansion: Leading RTAs have expanded beyond core registrar and transfer functions to provide adjacent services including compliance support, investor analytics, corporate governance advisory, and digital transformation consulting.
4. Integration with Other Intermediaries: Operational integration between RTAs, depositories, clearing corporations, and exchanges has created more seamless market infrastructure, particularly for corporate actions and investor service.
   

This market evolution reflects both competitive dynamics and regulatory influence, with SEBI’s progressive raising of operational standards driving consolidation toward entities capable of significant technology investment and comprehensive service capabilities.

Challenges & Future Directions for SEBI RTAs Regulations

Despite significant progress, several challenges remain in the regulatory framework established by the SEBI RTAs Regulations, 1993:

Digital Transformation

The transition to fully digital operations presents both opportunities and challenges:

1. Legacy Systems: Many RTAs operate on technology platforms originally designed for earlier market structures, creating challenges in adaptation to contemporary requirements.
2. Cybersecurity: As operations become fully digital, the security of investor records and transaction processing faces increasing threats requiring sophisticated protection mechanisms.
3. Digital Identity: The verification of investor identity for service requests continues to balance security requirements with service accessibility, particularly challenging in a diverse market with varying technological adoption.
4. Data Privacy: Growing regulatory focus on data protection requires RTAs to implement comprehensive frameworks for investor data privacy while maintaining necessary information sharing with market participants.

Recent regulatory focus has included specific cybersecurity standards for RTAs, mandatory security audits, and enhanced requirements for investor data protection protocols.

Investor Service Enhancement

As investor expectations evolve, service standards face increasing scrutiny:

1. Service Timeliness: Progressive reduction in acceptable processing timeframes for investor requests, from weeks to days to hours for certain services.
2. Communication Standards: Evolution from physical mail to electronic communication to real-time status updates and proactive notifications.
3. Grievance Resolution: Enhanced expectations for prompt resolution of investor complaints, with regulatory mandates for timeframes and escalation mechanisms.
4. Accessibility: Requirements for service access through multiple channels including physical offices, call centers, web portals, mobile applications, and social media interfaces.
   

Regulatory initiatives have included mandated service level standards, disclosure of service statistics, and penalty frameworks for service failures.

Corporate Action Standardization

The processing of corporate actions remains a complex area requiring further standardization:

1. International Alignment: Increasing pressure to align Indian corporate action processing with global standards, particularly regarding ex-dates, record dates, and payment cycles.
2. Process Automation: Movement toward straight-through processing of corporate actions with minimal manual intervention.
3. Information Standardization: Development of standardized data formats for corporate action announcements, processing, and investor communications.
4. Cross-Border Considerations: Growing requirements for handling corporate actions for international securities and for Indian securities held by international investors.
   

Recent regulatory discussions have explored potential mandated standards for corporate action processing timelines, information formats, and investor communication protocols.

Emerging Investor Categories

New investor categories create specialized service requirements:

1. Foreign Portfolio Investors: International investors require specialized servicing reflecting cross-border considerations, custody arrangements, and regulatory reporting requirements.
2. New Domestic Institutions: The growth of alternative investment funds, insurance investment portfolios, and pension funds creates distinctive service needs different from traditional institutional or retail investors.
3. Digital Natives: Younger investors expect fully digital, mobile-first service experiences aligned with contemporary technology platforms.
4. Senior Citizens: Aging investors may require specialized accessibility considerations and additional verification protections.
   

Regulatory guidance has increasingly recognized these differentiated needs while maintaining core principles of investor protection across all categories.

Future Growth Directions for RTAs

The RTA function continues to evolve, with several trends likely to shape future development:

Blockchain Applications

Distributed ledger technology offers significant potential for RTA functions:

1. Ownership Records: Blockchain-based ownership registries could enhance security, transparency, and accessibility of shareholder records.
2. Corporate Actions: Smart contracts could automate dividend distributions, rights offerings, and other corporate actions with enhanced efficiency and reduced errors.
3. Voting Systems: Blockchain-based voting platforms could increase participation in corporate governance while enhancing vote verification and transparency.
4. Share Transfers: Distributed ledger systems could streamline transfer processes with real-time settlement and enhanced security.
   

While regulatory frameworks have not yet specifically addressed blockchain applications for RTAs, consultative papers and industry discussions suggest growing interest in exploring controlled implementation of these technologies.

API Ecosystems

Application Programming Interface (API) frameworks offer potential for enhanced service integration:

1. Issuer Integration: Standardized interfaces between issuer systems and RTA platforms to streamline corporate action initiation and reporting.
2. Investor Service Platforms: APIs allowing investors to access RTA services through multiple channels including banking platforms, investment applications, and financial advisor systems.
3. Regulatory Reporting: Automated data flows from RTAs to regulators for compliance monitoring and market surveillance.
4. Market Infrastructure Connectivity: Seamless integration between RTAs, depositories, exchanges, and clearing systems to enhance process efficiency.
   

Regulatory discussions increasingly recognize the potential of standardized API frameworks to enhance market efficiency while maintaining appropriate security and access controls.

Data Analytics Enhancement

Advanced analytics offers opportunities for improved service and risk management:

1. Investor Behavior Analysis: Using historical patterns to predict service needs and potential issues.
2. Fraud Detection: Advanced pattern recognition to identify anomalous transactions or suspicious activity.
3. Service Optimization: Analytics-driven improvement of processing workflows and resource allocation.
4. Regulatory Compliance: Proactive identification of potential compliance issues through pattern analysis.
   

While privacy considerations create boundaries for data utilization, the regulatory framework increasingly recognizes the potential of appropriate analytics to enhance both service quality and investor protection.

Conclusion  

The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, have established a comprehensive framework for a critical market infrastructure function that directly impacts investor experience and confidence. From their introduction during the early reform period of India’s capital markets through multiple adaptations addressing dematerialization and digital transformation, these regulations have maintained focus on the fundamental objectives of accurate ownership records, efficient transfer processing, and responsive investor service.

The dramatic transformation of the RTA function from paper-based record-keeping to sophisticated digital operations illustrates the adaptability of principles-based regulation. While the core regulatory objectives remained consistent, the interpretation and implementation of these principles evolved with market structure and technological capabilities, guided by judicial interpretations that emphasized purposive rather than static application of regulatory requirements.

As India’s capital markets continue to evolve in sophistication, international integration, and technological capability, the RTA regulatory framework will face ongoing challenges requiring further adaptation. Digital transformation, service enhancement expectations, corporate action standardization, and emerging investor categories will necessitate continued regulatory evolution balancing investor protection with operational efficiency.

The SEBI RTAs Regulations 1993 demonstrate SEBI’s approach to infrastructure regulation – establishing necessary standards and accountability mechanisms while allowing market evolution and technological advancement to enhance service capabilities. This balanced approach has supported the dramatic transformation of India’s securities markets while maintaining focus on the fundamental objective of investor protection through reliable, efficient market infrastructure.

References

1. Agarwal, S., & Patil, R. (2021). Evolution of Registrar and Transfer Agent Functions in Indian Securities Markets. Journal of Securities Operations & Custody, 13(2), 157-173. 
2. Balasubramanian, N., & Janakiraman, S. (2018). Corporate Governance and Shareholder Record Management in India: The Role of RTAs. Indian Journal of Corporate Governance, 11(1), 45-62. 
3. Chandrasekhar, K. (2019). Digitization of Investor Services: Regulatory Framework and Implementation Challenges. Securities Market Journal, 8(3), 112-129. 
4. Das, S., & Sharma, A. (2020). Blockchain Applications in Securities Servicing: Opportunities and Challenges for Registrars. International Journal of Blockchain Technology, 12(2), 78-94. 
5. Jain, R., & Aggarwal, M. (2017). Dematerialization Impact on Registrar Functions: Historical Analysis of Indian Market Evolution. NSE Working Paper Series, No. WP-31. 
6. Karvy Computershare v. SEBI, Appeal No. 191 of 2017, Securities Appellate Tribunal (November 28, 2017). 
7. KFin Technologies v. SEBI, Appeal No. 147 of 2020, Securities Appellate Tribunal (October 15, 2020). 
8. Link Intime India v. SEBI, Appeal No. 238 of 2019, Securities Appellate Tribunal (August 11, 2019). 
9. Ministry of Finance. (2015). Report of the Financial Sector Legislative Reforms Commission. Government of India, New Delhi. 
10. Prasad, V., & Singh, R. (2022). Service Quality in Securities Market Infrastructure: Comparative Analysis of RTA Performance Metrics. Journal of Financial Market Infrastructures, 10(3), 45-67. 
11. Securities and Exchange Board of India. (1993). SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993. Gazette of India, Part III, Section 4. 
12. Securities and Exchange Board of India. (2018). Report of the Committee on Strengthening the RTA Framework. SEBI, Mumbai. 
13. Sharma, N., & Gupta, A. (2019). Corporate Action Processing in Indian Securities Markets: Standardization Challenges and Opportunities. Journal of Securities Market, 7(2), 128-145. 
14. Venkatesh, S., & Subramaniam, K. (2016). Investor Experience in Indian Capital Markets: The Role of Market Infrastructure Providers. Vision: The Journal of Business Perspective, 20(4), 278-293. 
15. World Bank. (2020). Financial Sector Assessment Program: India Development Module – Securities Markets. World Bank Group, Washington, DC. 

The post SEBI RTAs Regulations 1993: Evolving Investor Servicing Framework appeared first on Bhatt & Joshi Associates.

Introduction

The Securities and Exchange Board of India (SEBI) enacted the Custodian Regulations in 1996 to establish a comprehensive regulatory framework for entities that provide safekeeping services for securities and other financial assets in India’s capital markets. These regulations emerged from SEBI’s recognition that as institutional investment increased in sophistication and scale, specialized intermediaries were needed to ensure the safe custody of securities, proper settlement of transactions, and the administration of corporate actions. Custodians serve as critical infrastructure providers in the securities ecosystem, particularly for institutional investors such as mutual funds, foreign portfolio investors, insurance companies, and pension funds. By creating a structured regulatory regime for custodial services, SEBI aimed to enhance investor protection, reduce settlement risk, and promote the development of India’s capital markets through improved market infrastructure.

History & Legislative Evolution of SEBI (Custodian) Regulations

The SEBI (Custodian) Regulations 1996 were introduced during a crucial period of transformation in India’s capital markets. The 1990s marked the beginning of significant market reforms following India’s economic liberalization in 1991. This period witnessed the establishment of the National Stock Exchange (1992), the transition from physical certificates to dematerialized securities through the Depositories Act (1996), and the introduction of various institutional investor categories in the Indian market.

The regulations, formally notified as the SEBI (Custodian) Regulations, 1996, were promulgated under Section 30 of the SEBI Act, 1992, which empowers SEBI to make regulations consistent with the Act. Prior to these regulations, custodial services were provided in an unstructured manner, primarily by banking institutions without specialized regulatory oversight. The absence of a dedicated regulatory framework for custodians created inconsistency in service standards, ambiguity in responsibilities, and potential custody risk for investors.

The timing of the regulations coincided with the increasing participation of foreign institutional investors in Indian capital markets, who required custodial services meeting international standards. Simultaneously, domestic institutional investors like mutual funds were growing in significance, necessitating improved custody infrastructure.

Over the years, the SEBI (Custodian) Regulations, 1996 have evolved through several amendments:

1. The 2006 amendments enhanced capital adequacy requirements and clarified segregation obligations.
2. The 2012 revisions strengthened the reporting framework and internal control requirements.
3. The 2018 amendments refined the governance framework and enhanced disclosure standards.
4. The 2020 amendments addressed operational considerations in the digital environment and strengthened cyber security requirements.

This evolution reflects SEBI’s responsive approach to addressing emerging challenges while maintaining the fundamental principles of investor protection and market integrity.

Registration Framework Under SEBI (Custodian) Regulations, 1996

Chapter II: Registration Framework for Custodian under SEBI Regulations 

Chapter II of the regulations establishes the registration requirements for custodians. Regulation 3 states:

“No person shall act as custodian unless he has obtained a certificate of registration from the Board under these regulations:

Provided that nothing contained in this regulation shall apply to the Reserve Bank of India constituted under the Reserve Bank of India Act, 1934 (2 of 1934).”

This provision establishes SEBI’s regulatory authority over custodians while recognizing the special status of the Reserve Bank of India as the central bank.

Eligibility Criteria under SEBI Custodian Regulations

Regulation 7 outlines the comprehensive eligibility criteria for registration:

“The Board shall not grant a certificate of registration under regulation 6 unless the applicant satisfies the following conditions, namely:— (a) the applicant is a body corporate; (b) the applicant has the necessary infrastructure, including adequate office space, vaults for safe custody of securities and computer systems capability, required to effectively discharge his activities as custodian; (c) the applicant has the necessary expertise in the field of providing custodial services, including controlling and monitoring system for taking care of assets under his custody or control; (d) the custodian has necessary mechanisms for investor protection; (e) the applicant has professional qualification or experience in providing custodial services; (f) the applicant has a net worth of not less than rupees fifty crore; (g) the applicant furnishes its consent to the Board for inspection, by the Board, of its books of accounts, records and documents; (h) the grant of certificate to the applicant is in the interest of investors in the securities market; and (i) the applicant is a fit and proper person.”

These eligibility requirements reflect the critical role custodians play in the financial system, with emphasis on financial strength, operational capabilities, and professional expertise. The substantial net worth requirement (Rs. 50 crore, equivalent to approximately $6 million) ensures that only well-capitalized entities can operate as custodians, given the significant value of assets under custody and potential liabilities arising from operational failures.

Application and Registration Process for Custodians

Regulations 4-6 establish a comprehensive application process:

1. Detailed application containing information about business model, organizational structure, and risk management frameworks
2. Due diligence of key management personnel
3. Assessment of technological infrastructure and operational capabilities
4. Review of internal control systems and client protection mechanisms
5. Evaluation of financial resources and capital adequacy

Upon successful evaluation, SEBI grants a certificate of registration, typically valid for five years and subject to renewal. This structured entry screening ensures that only qualified entities with appropriate resources and expertise can function as custodians.

General Obligations and Responsibilities of Custodians under SEBI Regulations

Chapter III: Core Obligations for Custodians

Chapter III establishes fundamental obligations for custodians. Regulation 12 mandates the segregation of activities:

“Where a custodian is carrying on any activity besides that of acting as custodian, then the activities relating to his business as custodian shall be separate and segregated from all other activities and its operations and activities as custodian shall be conducted under the supervision of at least one director who shall not be directly engaged in the management or operations of any other activity.”

This provision ensures that custodial operations are insulated from other business activities the entity might undertake, preventing conflicts of interest and protecting client assets from potential risks arising from non-custodial businesses.

Client Agreement Requirements for Custodians

Regulation 13 mandates a written agreement with clients:

“Every custodian shall enter into an agreement with each client on whose behalf it is acting as custodian and every such agreement shall provide for the following matters, namely:— (a) the circumstances under which the custodian will accept or release securities, assets or documents from the custody account; (b) the circumstances under which the custodian will accept or release monies from the custody account; (c) the circumstances under which the custodian will receive rights or entitlements on the securities of the client; (d) the circumstances and the manner of registration of securities in respect of each client; (e) details of the insurance, if any, to be provided for by the custodian.”

This requirement ensures clarity regarding the custodian’s responsibilities and the operational parameters of the custodial relationship, preventing ambiguity that could lead to disputes or operational failures.

Monitoring and Compliance Obligations for Custodians

Regulation 14 requires robust internal monitoring:

“Every custodian shall have adequate internal controls to prevent any manipulation of records and documents including audits for securities and rights or entitlements arising from the securities held by it on behalf of its client.”

Additionally, Regulation 15 establishes record-keeping obligations:

“Every custodian shall maintain the following records and documents, namely:— (a) records of all securities received and released on behalf of each client; (b) records of all documents received and released on behalf of each client; (c) records of all monies received and released on behalf of each client; (d) records of all corporate actions initiated by the client through the custodian; (e) records of communication received from and sent to clients; (f) records of instructions received from and furnished to clients.”

These provisions create a comprehensive compliance framework ensuring operational discipline and the ability to reconstruct transaction histories when needed.

Segregation of Client Assets under SEBI Custodian Regulations

Regulation 16 establishes crucial asset segregation requirements:

“(1) Every custodian shall keep the securities of all clients separate from securities held by himself. (2) Every custodian shall keep the securities of each client separate, unless the client specifically directs otherwise in writing. (3) Every custodian shall: (a) keep securities which are held in dematerialised form in separate accounts; (b) register securities which are not held in dematerialised form in its own name as a custodian or in the name of its nominee but shall be easily identifiable as securities belonging to a specific client; and (c) not derive any benefits by way of securities lending or otherwise from the securities of a client unless specifically directed to do so by the client.”

This segregation requirement represents a cornerstone of custodial regulation, ensuring that client assets are protected from the custodian’s own business risks and preventing misappropriation or unauthorized use of client securities.

Code of Conduct for Ethical Custodial Practices

Schedule III contains a detailed code of conduct for custodians. Key provisions include:

1. Maintaining high standards of integrity, fairness, and due diligence
2. Exercising proper care in handling client assets
3. Avoiding conflicts of interest that could compromise client interests
4. Maintaining confidentiality of client information
5. Providing prompt and accurate information to clients
6. Cooperating with regulatory authorities

These ethical standards complement the operational requirements, creating a comprehensive framework for custodian behavior.

Landmark Judicial Interpretations on SEBI Custodian Regulations

Standard Chartered Bank v. SEBI (2010)

This SAT appeal addressed the fundamental nature of custodial responsibilities. Standard Chartered Bank had challenged SEBI’s order regarding certain operational deficiencies in its custodial services. The tribunal’s judgment established:

“The custodian’s role extends beyond mere physical safekeeping to encompass active monitoring and facilitation of the settlement process. The custodial obligation includes not merely the passive holding of assets but the exercise of due diligence in ensuring that client instructions are properly implemented within the parameters of regulatory requirements and market practices.

The segregation obligation under Regulation 16 requires not merely technical separation of accounts but substantive protection of client assets through appropriate operational controls, reconciliation processes, and governance mechanisms. This segregation represents the core of the custodial function and the primary protection mechanism for client assets.

The custodian’s responsibility includes maintaining appropriate verification processes for client instructions, particularly regarding the release of assets or execution of significant transactions. While the custodian is not expected to second-guess legitimate client instructions, it must maintain reasonable verification mechanisms to prevent fraud or operational errors.”

This judgment clarified that custodial responsibilities are substantive rather than merely procedural, requiring active diligence rather than passive compliance with technical requirements.

Deutsche Bank v. SEBI (2015)

This case focused on custodial obligations for foreign portfolio investors (FPIs). Deutsche Bank had sought clarification regarding its responsibilities in monitoring FPI compliance with Indian investment restrictions. The SAT judgment noted:

“The custodian’s role in the FPI context includes both transaction processing and certain compliance monitoring functions. While the primary responsibility for investment compliance rests with the FPI itself, the custodian serves as an important second line of defense in the regulatory framework by implementing pre-execution checks for clear regulatory breaches and post-trade monitoring for more complex compliance requirements.

The custodian must implement reasonable systems to identify obvious breaches of sectoral limits, aggregate investment caps, or prohibited investment categories before execution. However, this obligation is limited to reasonably detectable violations based on information available to the custodian and does not extend to complex determinations requiring information beyond the custodian’s reasonable access.

The custodian-client agreement must clearly delineate respective responsibilities regarding compliance monitoring, with specific attention to information flows, escalation procedures for potential violations, and resolution mechanisms for disputed interpretations of regulatory requirements.”

This judgment established important parameters regarding the custodian’s role in the regulatory compliance framework for foreign investors, balancing transaction facilitation with appropriate compliance monitoring.

HDFC Bank Custodial Services v. SEBI (2018)

This case addressed the segregation requirements under the regulations. HDFC Bank had challenged SEBI’s interpretation regarding operational segregation between custodial and other banking services. The tribunal held:

“The segregation requirement under Regulation 12 extends beyond mere legal or accounting separation to encompass operational independence, governance distinction, and functional separation. While housed within the same legal entity, the custodial business must maintain operational autonomy sufficient to ensure that conflicts of interest with other banking activities are appropriately managed and client assets are protected from risks arising from non-custodial operations.

This segregation must be reflected in: (a) dedicated management oversight through a director not involved in other banking operations; (b) separate operational teams and reporting lines; (c) distinct risk management and compliance frameworks; (d) information barriers preventing inappropriate access to custodial client information; and (e) separate record-keeping and audit trails.

The purpose of this segregation is not merely organizational but protective—ensuring that the custodial function maintains focus on client asset protection without being compromised by commercial pressures or conflicts from other banking activities.”

This judgment provided important clarification regarding the practical implementation of the segregation requirement, emphasizing its substantive protective purpose rather than merely formal compliance.

Institutional Framework and Market Structure

The SEBI (Custodian) Regulations 1996 have shaped a distinctive market structure for custodial services in India:

Market Participants

The custodial landscape has evolved to include several categories of service providers:

1. Global Custodian Banks: International financial institutions like Deutsche Bank, Standard Chartered, Citibank, and HSBC that provide custodial services as part of their global networks, primarily serving foreign portfolio investors and global asset managers. 
2. Domestic Bank Custodians: Indian banks such as HDFC Bank, ICICI Bank, and State Bank of India that have established custodial service divisions serving domestic institutional investors. 
3. Specialized Custodians: Entities focused exclusively on custody services without engaging in commercial banking, although this category remains limited in the Indian market.
   

The market exhibits significant concentration, with the top five custodians holding over 80% of assets under custody, reflecting the economies of scale and network effects in custodial services.

Service Evolution

Custodial services have evolved substantially since the regulations were introduced:

1. Core Services: Safekeeping of securities, settlement of transactions, asset servicing (corporate actions, income collection), and record-keeping remain the foundation of custodial offerings. 
2. Enhanced Services: Fund accounting, compliance monitoring, performance measurement, securities lending facilitation, and collateral management have been added as value-added services. 
3. Technology Integration: Substantial investments in technology platforms for transaction processing, reporting, and client interfaces have transformed service delivery models. 
4. Cross-Border Capabilities: Enhanced capabilities for international investors, including market entry services, regulatory reporting, and tax reclamation assistance.
   

This service evolution reflects both competitive pressures and the growing sophistication of institutional investors in the Indian market.

Challenges & Future Outlook for SEBI (Custodian) Regulations

Despite significant progress, several challenges remain in the custodial services framework:

Digital Transformation

The transition to fully digital custody models presents both opportunities and challenges:

1. Dematerialization has eliminated many physical custody risks but introduced cybersecurity concerns. 
2. Automation of transaction processing reduces operational errors but creates technology dependency risks. 
3. Blockchain and distributed ledger technologies offer potential for enhanced efficiency but raise new regulatory questions about asset protection and legal certainty. 
4. Digital asset custody for cryptocurrencies and tokenized securities remains a regulatory frontier requiring specialized custody solutions.
   

Recent regulatory attention has focused on cybersecurity standards for custodians, including mandatory security audits, incident response protocols, and business continuity requirements.

Liability Framework

The appropriate calibration of custodian liability continues to evolve:

1. Determining appropriate boundaries between custodian liability and client responsibility, particularly regarding investment decisions and compliance obligations. 
2. Establishing clear standards for operational failures versus force majeure events. 
3. Developing appropriate insurance frameworks for custodial risks. 
4. Addressing liability in increasingly complex multi-custodian arrangements involving global custodians, sub-custodians, and central securities depositories.
   

Recent regulatory discussions have explored potential standardization of liability provisions in custodian agreements to create greater consistency and predictability.

Emerging Client Needs

As institutional investors evolve, custodial services face new requirements:

1. Alternative Assets: Traditional custody models designed for exchange-traded securities require adaptation for increasing allocations to alternative investments like private equity, real estate, and infrastructure. 
2. ESG Integration: Growing focus on environmental, social, and governance factors creates demand for new data services, proxy voting support, and engagement assistance from custodians. 
3. Data Analytics: Institutional investors increasingly seek enhanced data analytics from custodians beyond traditional reporting. 
4. Cross-Border Efficiency: As Indian investors expand globally and foreign investors increase Indian allocations, demand grows for seamless cross-border custody solutions. 

Regulatory frameworks may need to evolve to accommodate these emerging service areas while maintaining core investor protection principles.

Global Regulatory Convergence 

As financial markets become increasingly interconnected, cross-border regulatory coordination grows in importance:

1. Aligning Indian custodial standards with global frameworks like the Financial Stability Board’s recommendations and the principles established by the International Organization of Securities Commissions (IOSCO). 
2. Addressing potential regulatory arbitrage between jurisdictions with different custodial requirements. 
3. Establishing appropriate supervision models for global custodians operating across multiple regulatory regimes. 
4. Developing consistent standards for emerging challenges like digital asset custody.
   

Recent international engagement by SEBI suggests movement toward greater harmonization with global standards while maintaining appropriate adaptation to India’s market context.

Conclusion 

The SEBI (Custodian) Regulations, 1996, have established a robust framework for custodial services in India’s capital markets. From their introduction during the formative years of India’s market reforms to the present day, these regulations have evolved to address emerging challenges while maintaining core principles of investor protection, segregation of assets, and operational diligence.

The regulations have successfully established custody as a specialized function with appropriate oversight, creating an essential component of market infrastructure serving institutional investors. The regulatory framework has balanced necessary prescription in critical areas like asset segregation with appropriate flexibility allowing for service innovation and market development.

As India’s capital markets continue to grow in size, sophistication, and international integration, the custodian regulatory framework will face ongoing challenges requiring further evolution. Digital transformation, emerging asset classes, and changing institutional investor needs will necessitate adaptive regulation that maintains investor protection while enabling innovation and efficiency.

The evolution of this regulatory framework reflects SEBI’s broader approach to market development—establishing necessary safeguards while promoting market maturation through appropriate infrastructure development. The SEBI (Custodian) Regulations, 1996 have played a significant role in establishing institutional investor confidence in India’s capital markets, contributing to market depth, efficiency, and global integration.

References

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3. Deutsche Bank v. SEBI, Appeal No. 139 of 2015, Securities Appellate Tribunal (October 12, 2015).
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10. Reserve Bank of India. (2021). Report of the Working Group on Digital Lending Including Lending Through Online Platforms and Mobile Apps. RBI, Mumbai.
11. Securities and Exchange Board of India. (1996). SEBI (Custodian) Regulations, 1996. Gazette of India, Part III, Section 4.
12. Securities and Exchange Board of India. (2018). Report of the Working Group on Strengthening the Custodial Framework. SEBI, Mumbai.
13. Standard Chartered Bank v. SEBI, Appeal No. 178 of 2010, Securities Appellate Tribunal (September 30, 2010).
14. Subramaniam, S., & Dangi, N. (2017). Institutional Investment in India: The Custody Infrastructure. Journal of Investment Compliance, 18(3), 78-91.
15. World Bank. (2020). Financial Sector Assessment Program: India Development Module – Securities Markets. World Bank Group, Washington, DC. 

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