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JSA Prism | Insolvency | April 2025

Please click here to download the Prism as a PDF.

Supreme Court clarifies non-applicability of moratorium under the Insolvency and Bankruptcy Code, 2016 to proceedings under the Negotiable Instruments Act, 1881

In a landmark ruling, a 2 (two) judge bench of the Hon’ble Supreme Court of India (“Supreme Court”) in the case of Rakesh Bhanot vs. M/s. Gurdas Agro Private Limited[1] held that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) cannot be stayed merely because a personal guarantor initiates insolvency resolution under Section 94 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Supreme Court emphasised that the interim moratorium under Section 96 of the IBC applies only to civil debt recovery, not criminal liability arising from cheque dishonour.

Brief facts

M/s Gurdas Agro Private Limited (“Respondent”) filed a complaint under Section 138 of NI Act, against M/s Arjun Mall Retail Holdings Private Limited through its directors, Rakesh Bhanot (“Appellant”) and others before the Judicial Magistrate First Class, Bathinda, (“Trial Court”) for dishonour of cheques for insufficiency of funds.
During the pendency of the aforesaid proceedings, the Appellant filed an application under Section 94 of the IBC before the Hon’ble National Company Law Tribunal, Chandigarh Bench (“NCLT”) seeking initiation of personal insolvency proceedings.
In view of the pending Section 94 application and the operation of interim moratorium under Section 96 of the IBC, the Appellant moved an application before the Trial Court seeking adjournment of the Section 138 proceedings sine die. The said application was rejected by the Trial Court.
Aggrieved by the rejection, the Appellant preferred a criminal petition under Section 482 of the Code of Criminal Procedure, 1973, before the High Court of Punjab and Haryana, which was also dismissed. Challenging the same, the lead criminal appeal was filed by the Appellant before the Supreme Court.
Notably, the Appellant contended that the moratorium under Section 96 of the IBC should be interpreted broadly to encompass criminal proceedings under Section 138 of the NI Act, as these arise from non-payment of a debt. The Respondent argued that the moratorium was intended only for civil recovery actions and not for penal proceedings, which serve a public interest by upholding the integrity of negotiable instruments.

Issue

Whether the interim moratorium under Section 96 of the IBC automatically stays criminal proceedings under Section 138 read with Section 141 of the NI Act against personal guarantors/directors?

Findings and analysis

Re: Moratorium cannot be misconstrued as a means to avoid criminal accountability

The Supreme Court examined the statutory language and legislative intent of Sections 94, 96, and 101 of the IBC. Briefly, Section 94 of the IBC provides for a situation wherein a debtor may approach the Adjudicating Authority for initiation of personal insolvency resolution process. Section 96 of the IBC deals with the commencement of interim moratorium from the date of application filed under Section 94 of the IBC in relation to all debts, i.e., deemed stay on any legal proceeding pending against the debtor concerning any debt. It held that the interim moratorium under Section 96 is designed to provide debtors with a temporary shield from civil recovery actions during the pendency of insolvency resolution, not to insulate them from criminal liability for statutory offences like dishonour of cheque.
The Supreme Court also held that the object of moratorium or the right of a debtor to approach the NCLT under Section 94 of the IBC is not to stall criminal prosecution or any proceedings unrelated to the recovery of the debt. The term “any legal action or proceedings” does not mean “every legal action or proceedings”. It must be interpreted to mean only proceedings concerning recovery of debt by invoking the principles of noscitur a sociis.

Re: The statutory liability against the directors under Section 138 of the NI Act continues to bind natural persons irrespective of any moratorium

The Supreme Court distinguished between actions for debt recovery (civil in nature) and prosecutions under Section 138 of the NI Act (criminal in nature). It observed that while the former may be stayed during the moratorium under the IBC, the latter are penal proceedings aimed at maintaining commercial discipline and trust in negotiable instruments.
The Supreme Court relying on Mohanraj vs. Shah Brothers Ispat Private Limited[2]and Ajay Kumar Radheyshyam Goenka vs. Tourism Finance Corporation of India Limited[3] reaffirmed that the moratorium under the IBC does not extend to criminal prosecutions. The Supreme Court emphasised that the object of the IBC is to facilitate resolution of financial distress, not to provide a refuge from personal criminal liability.
The Supreme Court further clarified that even if the underlying debt is extinguished or restructured through insolvency proceedings, the personal criminal liability of signatories or directors under Section 138 of the NI Act persists. The acceptance of a resolution plan under Section 31 of the IBC or the operation of a moratorium does not absolve individuals from prosecution for dishonour of cheque.

Conclusion

The Supreme Court’s judgment provides much needed clarity on the interplay between insolvency proceedings and prosecutions for dishonour of cheques. The interim moratorium under Section 96 of the IBC is limited to civil actions for recovery of debt and does not shield individuals from criminal liability under Section 138 of the NI Act. This ensures that the statutory deterrence against dishonour of cheques remains robust, and the integrity of commercial transactions is preserved.
The judgment also comes down heavily on attempts to misuse insolvency mechanisms as a shield against criminal accountability, reinforcing the principle that insolvency is a process for resolution, not a refuge from liability.
The Supreme Court emphasised that the object of the IBC is to facilitate the resolution of genuine financial distress and not to provide a refuge for individuals seeking to evade statutory penal consequences. The ruling demonstrates that the phrase “legal action or proceeding in respect of any debt” in Section 96 of the IBC must be interpreted in the context of civil proceedings for debt recovery and cannot be stretched to include criminal prosecutions which are fundamentally punitive and serve public interest.
The Supreme Court has further highlighted that the provisions for moratorium under the IBC are designed to offer a breathing space to enable reorganisation of financial affairs without the immediate threat of creditor actions. The provisions of moratorium flow with the overall scheme of a complete resolution such that the business of the debtor or corporate debtor can be started with a fresh slate or can be liquidated if resolution is not a viable option. Thus, in no way can a moratorium be interpreted to mean that it absolves an individual from criminal liability.
The Supreme Court has further clarified that the proceedings under Section 138 of the NI Act are not primarily for recovery of debt but rather for initiating criminal action against issuer of dishonoured cheque.
This judgment therefore ensures that creditors retain the ability to pursue both insolvency remedies and criminal prosecutions against defaulting companies and its directors, in turn maintaining the integrity of the financial system. It prevents the misuse of insolvency proceedings as a tool for delaying or avoiding criminal accountability and reinforces the legislative intent behind both the IBC and the NI Act.

This Prism has been prepared by:

Sidharth Sethi
Partner

Varghese Thomas
Partner

Fatema Kachwalla
Partner

Virgil Braganza
Senior Associate

Kunal Saini
Associate

Shivangi Pathak
Associate

For more details, please contact [email protected]

[1] Criminal Appeal No.1607 of 2025; (2025 INSC 445)

[2] (2021) 6 SCC 258

[3] (2023) 10 SCC 545

Tags Cheque Bounce, Commercial Law, Creditor Rights, Ibc, Insolvency and Bankruptcy Code, JSA, Legal Update, Negotiable Instruments Act, NI Act, Personal Guarantor, Supreme Court

JSA Prism | Finance | April 2025

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The Securities and Exchange Board of India redefines High Value Debt Listed Companies

The Securities and Exchange Board of India (“SEBI”) has amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) pursuant to the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2025 (“LODR Amendment”). The LODR Amendment has come into effect on March 27, 2025.

The LODR Amendment redefines High Value Debt Listed Companies (“HVDLEs”) to mean entity which has outstanding listed non-convertible debt securities of INR 1,000 crore (Indian Rupees one thousand crore) and above (“HVDLE Threshold”) as on March 31, 2025 and also prescribes the corporate governance for HVDLEs.

Key Changes

Applicability

Any entity with an outstanding listed non-convertible debt securities of the HVDLE Threshold as on March 31, 2025, will be a HVDLE. This threshold has been increased from INR 500 crore (Indian Rupees five hundred crore) as existing previously.
If any entity meets the HVDLE Threshold, then such entity will be required to comply with the regulatory and disclosure requirements within 6 (six) months from the date of such trigger. The disclosure of such compliance will be required to be made in the corporate governance compliance report on and from the date of the third quarter following the date of such a trigger.
An entity which becomes a HVDLE must continue to comply with the requirements applicable to a HVDLE till the value of the outstanding listed debt securities as on March 31 in a year, reduces and remains below the HVDLE Threshold for a period of 3 (three) consecutive financial years. Previously, the relevant corporate governance requirements would continue to remain applicable until all the listed debentures were redeemed regardless of whether a listed entity’s outstanding listed debt securities fell below the prescribed threshold.
REITS and InvITs are not required to comply with these corporate governance requirements and continue to be governed by the SEBI regulations specifically applicable to them.
The corporate governance provisions proposed pursuant to the LODR Amendments are in addition to the requirements set out in the Companies Act, 2013.

Additional corporate governance requirements under the LODR Amendments

Debenture trustee consent for material related party transactions:
- HVDLEs are required to obtain consent from the debenture trustee (“Debenture Trustee Consent”) for all material related party transactions[1]. The debenture trustee consent should be provided after the debenture trustee has obtained approval from the debenture holders who are not related to the issuer and hold at least 50% of the debentures in value. HVDLE can proceed to obtain the approval of the shareholders only upon the receipt of the Debenture Trustee Consents.
- This requirement is only applicable to debt securities which are issued after April 1, 2025, and does not apply to debt securities which have been issued until March 31, 2025.
- Further, the requirement of Debenture Trustee Consent does not apply in the following cases:
  - transactions entered into between 2 (two) government companies (as defined under the Companies Act, 2013);
  - transactions entered into between a holding company and its wholly owned subsidiary (“WOS” whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval; and
  - transaction entered into between two WOSs of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
- This is a major departure from the existing regime where no such consent from debenture trustees were required.

Introduction of a separate regime for HVDLEs which do not have any specified securities listed:
- The LODR Amendment introduces a new Chapter VA which sets out the corporate governance requirements applicable to HVDLEs, which do not have any specified securities (i.e. equity shares’ and ‘convertible securities’ as defined under clause 33 (eee) of sub-regulation (1) of regulation 2 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018) listed on any stock exchange. HVDLEs which have any specified securities listed on any stock exchange, continue to be governed by the requirements set out under Regulations 15 to 27 of the LODR.
- The corporate governance requirements prescribed under Chapter VA as introduced by the LODR Amendment remain substantially similar to what is provided under Regulations 15 to 27 of the LODR. These include board composition and corporate governance requirements such as appointment of woman directors, independent directors, constitution of audit committee, nomination and remuneration committee and audit committee
- HVDLEs which are governed by Chapter VA as introduced by the LODR Amendment have the flexibility to constitute the nomination and remuneration committee, the stakeholder relationship committee and the risk management committee or discharge their functions through the board of directors. This will ease the burden of constituting various committees by such HVDLEs.

Conclusion

The introduction of the LODR Amendment is primarily aimed at simplifying and streamlining the corporate governance norms of HVDLEs. The changes introduced pursuant to the LODR Amendment are largely in alignment with the consultation paper introduced by the SEBI in October 2024 to address issues concerning listed entities with a significant exposure in the debt capital markets.

The increase in the threshold of applicability has rightly been revised to INR 1,000 crore (Indian Rupees one thousand crore) to ensure ease of doing business, especially for companies which are in a nascent stage in accessing the debt markets generally and does not apply to entities which do not have major exposure to the debt capital markets.

Having said that, the additional requirement of procuring debenture holder consent for material related party transaction may prove to be burdensome. Usually, the requirement of consent of the debenture holders for related party transactions is commercially driven and may not be the norm. Non-banking financial companies with multiple debt issuances and a large exposure to debt markets may struggle to obtain such consent which was not commercially sought for by the debenture holders. This will also affect covenant-lite perpetual or subordinated debt instruments which usually do not have these consent items in their contracts. Delay or failure to obtain such consent from debenture holders (especially, retail participants where the debentures are widely held) may stall any strategic sale or other forms of corporate restructuring by the issuers which may be time sensitive in nature and was not contractually permitted. In light of the above, it will be interesting to see how some of the HVDLEs navigate through this new framework especially since the regulators have been trying to deepen the bond market in the recent past.

This Prism has been prepared by:

Utsav Johri
Partner

Pritha Chatterjee
Partner

For more details, please contact [email protected]

[1] A material related party transaction is defined in the LODR Regulations as transaction with a related party is considered material if the transaction to be entered into individually or taken together with previous transactions during a financial year, exceeds INR 1,000 crore (Indian Rupees one thousand crore) or 10%. of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.

Tags Compliance, Corporate Law, Debt market, Debt Securities, High Value Debt, JSA, JSA Prism, Listed Entities, LODR, Regulatory Update, SEBI, SEBI Update

JSA Prism | Finance | April 2025

Please click here to download the Prism as a PDF.

Proposed Framework on Securitisation of Stressed Loans

The Reserve Bank of India (“RBI”) has issued the Draft Directions on Securitisation of Stressed Assets on April 9, 2025 (“Draft Directions”). The Draft Directions sets out a Framework for Securitisation of Stressed Assets (“Stressed Asset Securitisation Framework”) to be undertaken by specified regulated entities of the RBI.

The Stressed Asset Securitisation Framework is set to deepen the secondary market of stressed loans by providing more flexibility to the banks and financial institutions to convert illiquid loans into tradable securities. Further, it will provide a broader mechanism for the regulated entities to undertake securitisation of their stressed loan exposures, similar to the framework applicable to securitisation of standard assets.

Overview of the proposed Stressed Asset Securitisation Framework

The key elements proposed in the Draft Directions are discussed below:

Applicability:
- Regulated entities: The Stressed Asset Securitisation Framework will be applicable to banks (including overseas branches of Indian banks), non-banking finance companies (including housing finance companies), small finance banks and all Indian financial institutions.

- Eligible assets:
  - a homogeneous pool of stressed loans can be securitised as per these Draft Directions. Such assets can be either: (A) personal loans (except educational loans) to individuals and business loans to individuals and micro enterprises not exceeding INR 50,00,00,000 (Indian Rupees fifty crore) (“Category A Loans”); or (B) other loans (“Category B Loans”);
  - the ‘pool of stressed loans’ is defined to mean a portfolio of stressed loans in which the sum of squares of the relative shares of underlying stressed loans is 0.30 or less. The ‘relative shares of underlying loans’ is calculated as the outstanding balance of each loan divided by total outstanding balance of the portfolio on the origination cut-off date; and

- - up to 10% of the aggregate outstanding exposures in the underlying pool can consist of standard assets and the remaining 90% must consist of non-performing assets;

- Excluded assets:
  - the Draft Directions continue to limit securitisation of exposures to other lending institutions, refinance exposures of AIFI, re-securitisation. Other kinds of exposures which are excluded are: (A) education loan; (B) farm credit; and (C) accounts marked as wilful defaulter or fraud or red flagged account; and
  - loans with bullet payments and revolving credit facilities are not excluded from the ambit of securitisation exposure;

Key features
- Minimum Retention Requirement (“MRR”) and Minimum Holding Period (“MHP”):
  - The originator will be required to maintain the MRR only in the following limited situations:

- - - if the originator is acting as the Resolution Manager (“RM”), the originator will have to retain a MRR of 5%; and
    - if the due diligence is performed on a sample basis with sample comprising of at least one third of the portfolio by value and number of loans in the portfolio, the originator will have to retain at least 10 % of the securitisation notes issued;

- - the originator and/or servicer can contractually be required to retain MRR; and

- - there is no obligation to maintain MHP requirement;

- RM:
  - the Draft Directions have introduced a concept of RM. RMs are responsible for carrying out resolution/recovery related activities of underlying exposures. Further the eligibility criteria of a RM are provided in the Draft Directions;
  - for Category A Loans, the RM can be the originator, or an entity regulated by RBI (including, a bank, non-banking finance company or asset reconstruction company). If the originator is the RM, then it must maintain at least 5% of the securitisation notes as discussed in paragraph 2 (a) (i) above;

- - for Category B Loans in addition to the entities which can be appointed for Category A Loans, following may also be appointed as RM: (A) entity registered with a financial sector regulator in India; (B) an insolvency professional registered with IBBI; or (C) insolvency professional entity; and

- - RM can also raise finance for the operational purpose of resolution of the stressed assets. Such finances cannot be provided by the originator or its group entities. There is also a threshold applicable for such finance (which is 75% of the total requirement).

Investor pool: For securitisation consisting of Category B Loans, persons disqualified by 29A of the Insolvency and Bankruptcy Code, 2016 with respect to the borrowers cannot be an investor to such securitisation.

All other conditions applicable to a special purpose vehicle under the Master Direction on Securitisation of Standard Assets, 2021 (“Standard Asset Directions”) will also apply for securitisation of stressed assets.

Price discovery sale consideration: The accounting provisions applicable for a securitisation under the Standard Asset Directions will also apply for securitisation of stressed assets. However, under the Stressed Asset Securitisation Framework, the assets cannot be said to be transferred unless the sale consideration has been paid. Sale consideration will have to be paid on cash basis.

The originators are also required to incorporate the price discovery methodology in their policies such that the realisable value of underlying stressed loans is reasonably estimated in a fair and transparent manner. For any securitisation involving Category A Loans, 2 (two) external valuation reports will also be required.

Credit enhancement: Originators can provide credit enhancement subject to such originators not exceeding the threshold of 20% of the total securitisation exposures created by such structure or scheme. RBI has clarified that any exposure beyond the limit of 10% (upto 20%) will be treated as a first loss facility and the originators will have to provide capital accordingly. The 20% limit on total retained exposures will not be deemed to have been breached if it is exceeded due to amortisation of securitisation notes issued.
Regulatory filings: Some of the key regulatory filings required to be undertaken are as follows:
- the originator is required to submit the details of the securitisation transactions to RBI on a quarterly basis and after the transfer, the special purpose vehicle will have to report the same to RBI. This provision will have to be built into the assignment agreement; and
- RBI has specified formats for reporting data of underlying borrowers and portfolio by the originators as well as servicers or RM. At least on a quarterly basis, the servicer or the RM is also required to provide the investors data to monitor pool performance.

Conclusion

RBI seemed to have responded to the industry requests and have considered a balance approach for securitisation of stressed loans. RBI’s approach aligns with the global securitisation practices. Such alignment can make Indian securitised products in stressed loans more attractive to international investors and facilitate cross-border investment flows.

Foreign portfolio investors, alternative investment funds and other domestic investors will now have an enabling framework to acquire and resolve stressed loans by investing through a special purpose vehicle without involvement of an asset reconstruction company. Institutional investors will also bring their expertise in faster resolution and turnaround of stressed loans.

The Stressed Asset Securitisation Framework allows for securitisation, which can potentially offer better recovery rates by tapping into a wider investor base and competitive pricing mechanisms.

This Prism has been prepared by:

Utsav Johri
Partner

Sucheta Bhattacharya
Partner

For more details, please contact [email protected]

Tags Alternative Investments, Banking, Distressed Assets, Finance, Financial Markets, Ibc, Insolvency, Investment, JSA, Nbfc, RBI, Resolution, Securitisation, Special Purpose Vehicle, Stressed Assets, Turnaround

Axis Bank Limited invests 250 Crores NCDs issued by CESC Limited

JSA advised Axis Bank Limited (as the Investor) and IDBI Trusteeship Services Limited (as the Debenture Trustee) in connection with a financing by way of subscription to unlisted, secured non-convertible debentures (“NCDs”) issued by CESC Limited (“CESC”), for an amount of INR 250 crores. CESC is a flagship company of the RP-Sanjiv Goenka Group, engaged in the business of generating and supplying electricity in Kolkata, Howrah and adjoining areas.

Our transaction team comprised of Lead Partner, Soumitra Majumdar, Partner, Shrijita Bhattacharya and Junior Associate, Gavin Pais.

Tags CESC, Corporate Law, Debt Funding, Electricity Distribution, Financial Services, India Deals, JSA Deal Alert, Legal Advisory, NCD, Non Convertible Debentures, Power Sector, Project Financing

From Don Bosco to Deal Tables in Capital Markets with Arka Mookerjee | Koffee Conversation

Our partner, Arka Mookerjee, was recently invited by Lion Amirr Virani to participate in a distinguished discussion for The Emerging Lawyer series at The Koffee Conversation Show.

In this insightful episode, Arka shares his remarkable journey from his formative years at Don Bosco and then at JSA to becoming a leading partner in the field of Capital Markets. His experiences and expertise offer invaluable insights for professionals navigating the complexities of the legal and business landscapes.

Tags JSA, JSA expertise, Koffee Conversation Show, Leading Law Firm, Leading Lawyers, Legal Insights, TEIF, The Emerging Lawyer

Proposed framework on partial credit enhancement

The Reserve Bank of India (“RBI”) has issued the draft guidelines on non-fund-based credit facilities on April 9, 2025 (“Draft Guidelines”). The Draft Guidelines propose a new and overhauled Framework for Partial Credit Enhancements (“Proposed PCE Framework”) to be issued by regulated entities. The Proposed PCE Framework intends to revamp the existing Partial Credit Enhancements (“PCE”) Framework introduced by the RBI pursuant to the circular dated September 24, 2015, on ‘PCE to Corporate Bonds’, as amended (“Existing PCE Framework”).

The Proposed PCE Framework is amongst the latest initiatives to bolster the growth in the infrastructure sector. This was outlined by the Government of India in the latest Union Budget which contemplated the setting up of a partial credit guarantee scheme for corporate bonds for infrastructure to address liquidity concerns. The Proposed PCE Framework will enable the issuers with a credit rating of less than ‘AA’ to access the bond market and not restrict their funding source to bank financing for infrastructure projects.

Overview of the Proposed PCE Framework

The key changes proposed in the Draft Guidelines are discussed below:

Applicability

Regulated Entities: The Proposed PCE Framework will be applicable to the following entities (collectively, “REs”):
- commercial banks;
- co-operative banks;
- all India financial institutions; and
- Non-Banking Finance Companies (“NBFCs”) in top, middle and upper layers (including, Housing Finance Companies (“HFCs”)).
Applicable instruments: Bonds issued by: (a) corporates and/or their special purpose vehicles for funding all types of projects; and (b) NBFCs with an asset size of INR 1,000 crore (Indian Rupees one thousand crore) or above.
Rating requirement: Issuers with a pre-enhanced rating of at least ‘BBB–’ are eligible to avail PCEs. Further, the bonds must be rated by 2 (two) registered credit rating agencies. The reports for both the pre-enhanced and post enhanced credit rating are required to be disclosed.

Nature of PCEs

Key Features: The following are the salient features of the PCE proposed under the Proposed PCE Framework:
- PCE cannot be in the nature of a guarantee;
- PCE must be provided at the time of issuance of the bonds;
- PCE must be irrevocable;
- PCE facilities to the extent drawn will be treated as an on-balance sheet advance in the balance sheet of the RE, unlike undrawn portions, which will be an off-balance sheet item;
- PCE must be provided by way of contingent lines of credit which may be drawn in case of shortfall of funds for servicing the bonds; and
- PCE may be revolving in nature.

Other salient features such as documentation and disclosure requirements in relation to the PCE to be provided by REs remain unchanged under the Proposed PCE Framework.

Permissible end use:
- The Proposed PCE Framework intends to enable issuers to tap the domestic debt market for long-term infrastructure projects. However, the PCE proceeds can only be utilised for servicing the bond and not for any other purpose. PCEs can only be provided at the time of issuance of the bonds and may be drawn down in case of any shortfall of funds for servicing such bonds.
- PCEs cannot be used for asset acquisition, project expenses, or corporate purposes. Further, the PCE proceeds cannot be utilised for servicing other lenders of the issuer irrespective of the seniority of claims of other creditors in relation to the bond holders or the end-use of the facilities availed from other lenders.
Restriction on RE participation: REs cannot participate in the bonds which have been credit enhanced by the other REs.

Coverage of PCEs

The coverage of PCEs is proposed to be increased from the exposure limit of 20% of the issue size by a single RE to 50% of the issue size of the bond under the Proposed PCE Framework.

The aggregate limit of all REs to a corporate bond backed by PCEs remains unchanged at 50% of the issue size.

Provisioning requirements

Capping of capital requirements for PCEs:
- The Proposed PCE Framework proposes to provide capital relief to REs granting PCEs to corporates.
- The provision requirement of REs will be relaxed and linked to the amount of the PCE granted. The Existing PCE Framework mandates provisioning for the difference between: (a) the capital required on the entire bond amount, corresponding to its pre-credit enhanced rating (regardless of the PCE provided by the RE); and (b) the capital required on the bond amount corresponding to its post-credit enhanced rating, as per the risk weights applicable to claims on corporates under the relevant provisioning guidelines.
- By way of an illustration, under the Proposed PCE Framework, for a bond issuance of INR 100 (Indian Rupees one hundred) and a pre-enhanced rating of the bond as ‘BBB’, the applicable risk weight at the pre-enhanced rating of ‘BBB’ is 100%. Accordingly, the capital requirement for the carrying amount of PCE will be as follows:

PCE Amount (in Indian Rupees)	Capital requirement for PCE provider
20	1.8 (20100%9%)
30	2.7 (30100%9%)
40	3.6 (40100%9%)
50	4.5 (50100%9%)

It is clarified that a PCE to a bond issuer will not amount to restructuring of the underlying project loan if: (a) the issuer has availed a loan from the RE which is a ‘standard asset’ (which is being refinanced out of the bonds being backed by the PCE); and (b) the borrower is not declared to be in financial distress.

Risk weights assigned to ratings
- The Proposed PCE Framework prescribes the following:
  - In case of change in the pre-enhanced rating of the bond, the capital required will be recalculated based on the risk weight applicable to the revised pre-enhanced rating, subject to a floor, i.e., the capital requirement on the PCE at the time of issuance of the PCE enhanced bonds;
  - If the outstanding amounts under the bonds exceed the aggregate PCE offered, then the capital held by the RE in such cases must not be less than the amount required to be held at the time of issuance of the PCE enhanced bond. However, if the bond outstanding has amortised below the aggregate PCE amount, the capital can be computed taking into account the outstanding bond amount; and
  - If the pre-enhanced rating of the bond slips below investment grade i.e. (BBB -), full capital to the extent of PCE provided must be maintained by all REs, including NBFCs and HFCs.

Repayment of PCE

Given that PCEs are to be used as a contingent measure to meet any shortfall in servicing requirements, the Proposed PCE Framework mandates that any drawn-down portion of the PCE must be repaid within a period of 30 (thirty) days. In the event such amounts remain unpaid for more than 90 (ninety) days, then the account will be classified as a non-performing asset in accordance with the extant RBI guidelines. Further, the aggregate PCE exposure of an RE must not exceed 20% of its Tier 1 capital.

PCEs for bond issuances by NBFCs and HFCs

Bonds issued by NBFCs and HFCs having a tenor of more than 3 (three) years will also be permitted to be supported by PCEs. However, the proceeds of such bonds must only be utilised for refinancing existing debt with robust monitoring of the end-uses. However, the exposure to REs regarding PCEs granted in connection with NBFCs and HFCs is capped at 1% of the capital funds of the RE within the single/group borrower exposure limits.

Conclusion

The Proposed PCE Framework is a welcome step in enhancing retail and non-retail participation in the funding requirements of the infrastructure sector and in NBFCs and HFCs (with an asset size of INR 1,000 crore (Indian Rupees one thousand crore) and above) and broadening the bond market. The capital relief proposed is likely to result in freeing up the balance sheets of the REs and would also address the deep-rooted concern of wider accessibility of capital of infrastructure companies which are generally restricted to financing by banks and NBFCs.

While the Proposed PCE Framework is being finalised, the RBI should consider providing for objective parameters signifying a genuine cash shortfall in debt service requirements with respect to drawing down of the PCEs.

In our view, the RBI has also provided for a well-rounded approach for the REs to analyse the creditworthiness of the issuer for providing the PCEs (including through due diligence and robust internal monitoring and rating systems) under the Proposed PCE Framework thereby enabling uniformity of credit appraisal between non fund based facilities and funded facilities.

This Prism has been prepared by:

Utsav Johri
Partner

Pritha Chatterjee
Partner

For more details, please contact [email protected]

Tags Bond Market, Credit Enhancement, Draft Guidelines, Ease Of Doing Business, Financial Regulations, HFCs, Housing Finance, Indian Banking, Infrastructure Financing, JSA Prism, JSA Thought Leadership, NBFC Funding, NBFCs, Partial Credit Enhancement, PCE Framework, RBI, RBI Update, Regulatory Updates, Retail Participation

JSA advises IDFC FIRST Bank on its fundraise of Rs 7,500 crores

JSA advised IDFC FIRST Bank on its fundraise from Warburg Pincus and Abu Dhabi Investment Authority (ADIA) aggregating upto Rs 7,500 crores. The fundraise is subject to shareholder and regulatory approvals.

IDFC FIRST Bank (“Bank”) is a new-age private bank in India, with a vision to create a world class bank in India, focused on ethical, digital, and social good banking. The Bank operates 971 branches spread over 60,000 locations including cities, towns, and villages across India. While it has a physical network, it is built as a digital first bank in approach, scale and scope. The Bank is a full suite universal bank offering services across Retail, MSME, rural, corporate, wealth management, private banking, Fastag, cash management, NRI and treasury solutions.

The Transaction team comprised Lead Partner, Vikram Raghani, Partner, Bir Bahadur Singh Sachar, Principal Associate, Sushim Aryan, Associates, Tavishi Chandra, Parth Mehta and Samika Pachouly & Company Secretary, Niki Shah.

The Banking team comprised Partner, Anish Mashruwala and Pratish Kumar, Principal Associate, Karan Abichandani & Associates, Anmol Narang, Madhur Bhatt and Arpita Mittal.

Media coverage – The Financial Express

Tags Abu Dhabi Investment Authority, Banking Sector, Capital Raise, Corporate Law, Digital Banking, Financial Services, Fundraise, IDFC FIRST Bank, India Banking, Investment News, JSA Deal Alert, Mergers and Acquisitions, New Age Banking, Private Equity, Warburg Pincus

JSA Brief | March 2025

This edition of the JSA Brief showcases JSA authored articles, updates & newsletters and achievements such as deals and events in all practice area over the preceding month (March 2025).

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Tags Articles, Deal Making, Events, JSA, JSA Prism, Legal Updates, Newsletters, Publications, Recognitions

JSA Prism | Securities Law | April 2025

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Investment in listed debt securities (rated A or below) by Category II Alternative Investment Funds will be considered as investments in unlisted securities

At its board meeting on March 24, 2025, the Securities and Exchange Board of India (“SEBI”) has resolved to amend Regulation 17(a) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”). The notification implementing this amendment is expected to be issued shortly.

Background

Regulation 17(a) under ‘Conditions for Category II Alternative Investment Funds’, of the AIF Regulations, states that “Category II Alternative Investment Funds shall invest in investee companies or in the units of Category I or other Category II Alternative Investment Funds as may be disclosed in the placement memorandum;

Explanation – Category II Alternative Investment Fund shall invest primarily in unlisted companies directly or through investment in units of other Alternative Investment Funds”

The SEBI master circular for AIFs dated May 7, 2024, clarified that “with respect to Regulation 17(a) of the AIF Regulations, the term ‘primarily’ is indicative of where the main thrust of Category II AIFs ought to be. The investment portfolio of a Category II AIF ought to be more in unlisted securities as against the aggregate of other investments.” Accordingly, Category II AIFs are required to invest more than 50% of the investible fund in unlisted securities.

At this juncture, it may be noted that amendments made to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in September 2023 introduced Regulation 62A which inter-alia required all listed entities that already have outstanding listed non-convertible debt securities (“NCDs”) or proposes to list NCDs on or after January 1, 2024, to necessarily list all other non-convertible debt securities on the stock exchange(s) issued on or after January 1, 2024.

Given this, the availability of investment opportunities in unlisted securities may possibly reduce in the future for AIFs for making fresh investments. In order to address this issue, SEBI floated a consultation paper on February 7, 2025, to review Regulation 17(a) of AIF Regulations, with the objective of ease of doing business. Subsequently, SEBI at its board meeting held on March 24, 2025, clarified that investments made by Category II AIFs in listed debt securities rated ‘A’ or below will be treated as akin to investments in unlisted securities for the purpose of their compliance with minimum investment conditions in unlisted securities.

Conclusion

SEBI’s proposed amendment to Regulation 17(a) of the AIF Regulations aims to provide flexibility for Category II AIFs in meeting their investment requirements by allowing investments in listed debt securities rated ‘A’ or below to count as unlisted securities i.e. be construed to be in compliance with the explanation to Regulation 17(a) of the AIF Regulations. This change is part of SEBI’s ongoing efforts to streamline processes and promote ease of doing business in the investment sector.

This Prism has been prepared by:

Varun Sriram
Partner

Nandini Menon V
Senior Associate

Nithyashree Venkatesh
Associate

For more details, please contact [email protected]

Tags Capital Markets, IPO, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, SEBI, Securities

JSA Prism | Securities Law | April 2025

Please click here to download the Prism as a PDF.

Governance of technical glitches in stock broker’s electronic trading systems – moving towards a more balanced framework

This Prism seeks to review the regulatory framework surrounding Technical Glitches (defined below) in light of the recent circular dated March 28, 2025, issued by Stock Exchanges (defined below).

SEBI circular dated November 25, 2022^[1]

On November 25, 2022, SEBI issued a circular (“SEBI Circular 2022”) introducing a framework to govern technical glitches in stock brokers trading systems. The intent behind the issuance of the circular was to tackle issues related to glitches and risks to avoid disruption of investors’ opportunity to trade.

Thus, SEBI recognised that the consequential effect of Technical Glitches could include financial loss as well as diminish investor confidence in a trading platform’s reliability, and as such, a resilient trading infrastructure was warranted to ensure seamless market operations and maintain investor confidence and participation. With this background, a working group was constituted to recommend suitable measures to address the issue as stated aforesaid, resulting in the release of the SEBI Circular 2022.

To simplify, a ‘Technical Glitch’ in the context of stock brokers broadly refers to any malfunction in the stock broker’s trading infrastructure (viz. hardware, software, networks, process etc.) that disrupt normal trading operations and impact trading operations and investor access for a contiguous period of 5 (five) minutes or more (“Technical Glitch”). Failure/ delays in order execution, data synchronisation issues, display of incorrect or delayed trading data are certain examples of Technical Glitches.

The SEBI Circular 2022 proceeds to introduce mechanisms and guidelines to deal with Technical Glitches occurring in the trading systems of stock brokers including in terms of reporting and monitoring of Technical Glitch. Briefly, in terms of reporting requirements, a single Technical Glitch requires 3 (three) separate reports viz. (a) an intimation report – within an hour of the incident (“1^st Report”); (b) a preliminary report – within the next day (“2^nd Report”); and (c) a Root Cause Analysis Report – within 14 (fourteen) days from date of incident (“3^rd Report”). Further, the SEBI Circular 2022 also mandated continuity planning in the event of natural disasters, change of management and software testing, and review of infrastructure in terms of accommodating client scalability. Towards the aforesaid, the SEBI Circular 2022 directed Stock Exchanges (viz. National Stock Exchange of India, BSE Limited, Metropolitan Stock Exchange of India, Multi Commodity Exchange of India Limited and National Commodity and Derivatives Exchange Limited (“Stock Exchanges”)) to build systems for implementing these provisions and establish a financial disincentives framework for both, non-compliance of the provisions and the occurrence/non-reporting of Technical Glitches.

Exchange Framework^[2]

In December 2022, pursuant to the SEBI Circular 2022, the Stock Exchanges introduced a framework in this regard (“Framework 2022”).

Essentially, the Framework 2022 outlined parameters and provided more detailed guidelines on the aspects raised in the SEBI Circular 2022 including in terms of: (a) reporting process and formats for each of the three reporting obligations; (b) manner of testing and periodic reviews for continuity planning; (c) criteria for applicability of additional requirements for specified members (i.e. stock brokers as will be notified by the Stock Exchanges (“Specified Members”)); and (d) enforcement action/penalty structure (“Penalising Structure”).

In terms of the Penalising Structure envisaged, a few essential elements are listed below:

Applicability: the Penalising Structure is applicable only to Technical Glitches which were continuing for more than 15 (fifteen) minutes.
Differentiated enforcement: Additionally, the Penalising Structure is segregated between those applicable to Specified Members and other stock brokers, with stricter sanctions applicable to Specified Members.
Progressive penalties: The number of Technical Glitches in a given financial year determines the severity of the enforcement action, which ranges from issuing an observation letter/administrative warnings to imposition of monetary penalty. The calculation of the monetary penalty increases with each instance of Technical Glitches without any upper limit. Further, Stock Exchanges have discretion to impose further disciplinary action basis severity.
Client restrictions: With respect to Specified Members, on the occurrence of more than 5 (five) Technical Glitches in the financial year, in addition to monetary penalty, restraint on on-boarding new clients will be imposed for a period.
Other penalties: Separate monetary penalties in case of non-reporting of Technical Glitches (with additional penalty for each additional day of non-reporting without an upper limit) and other events in terms of disaster recovery.

To summarise, the Penalising Structure for a Technical Glitch can be grouped as follows:

Time duration of the Technical Glitch	Reportable	Whether subject to Penalising Structure
0-5 mins	No	No
5-15 mins	Yes	No
More than 15 mins	Yes	Yes

However, the broad definition of ‘Technical Glitch’ appears to encompass all instances of glitches, regardless of their direct impact on trading operations or investor experience and may be beyond the objective set out in the SEBI Circular 2022 which was limited to those Technical Glitches that “…impact on the investors’ opportunity to trade ….”. This coupled with a progressive penalty structure without an upper limit, gives rise to the possibility of penalties accumulating indefinitely. Not to mention the increased compliance burden of reporting arguably non-relevant Technical Glitches in a time bound manner. These aspects, amongst others, necessitated greater clarity and a more balanced regulatory approach.

Stock Exchange circular dated March 28, 2025^[3]

Following representations from stock brokers and the Brokers Industry Standard Forum, the Stock Exchanges released respective circulars dated March 28, 2025 (“SE Circular”), inter alia containing a set of Frequently Asked Questions (“SE FAQs”), a revised Penalising Structure and reporting formats.

The SE Circular and SE FAQs clarify certain ambiguities, refining the practical implementation of the Framework 2022. The key clarifications and resolutions provided are tabulated below.

Sr.No.	Clarification provided in brief	Specific inclusions (if any) in terms of the clarification
Definition of Technical Glitch
1.	a) The SE FAQs clarify that any glitch incident which may lead to either stoppage, slowing down or variance in normal functions/ operations/ services of stock broker for a continuous period of 5 minutes or more must be reported as Technical Glitch. This has been elaborated to specifically include certain kinds of Technical Glitches. b) That said, the SE FAQs also provides certain examples of supporting functions (viz. visibility of technical charts, suggestions or news as well as price update delay provided available on refresh of page) which will not be considered as a Technical Glitch.	Any glitch will be considered a Technical Glitch irrespective of: a) availability of alternative mode of service; b) the number of clients affected; c) whether the same occurred in trading application or support functions; d) segment where such glitch took place; e) whether the same took place in backend office so long as they affect the trading, settlement or decision making process of the client; f) whether the same took place during trading hours or not; g) whether the same was on account of Market Infrastructure Institutions (“MII”) or third-party service providers or vendors; and h) whether the same took place in the primary site or disaster recovery site of the stock broker in a live drill.
Penalising Structure
1.	While the scope of Technical Glitch remains broad, the SE FAQs clarify that certain glitches even though fall under the definition of Technical Glitch and thus, reportable, will not be subject to the Penalising Structure.	A Technical Glitch exclusively on account of the following may not attract penal action: a) global issue with cloud service providers; b) technology disruption due to issues at MII (glitch reported by MII to SEBI); c) technological issues in processing of a new trading account i.e. know your customer process; d) back office/operational issues not impacting trading and settlement of the clients; e) Technical Glitch occurred during non-trading hours and not having any impact on trading activities of clients; f) failure of payment gateway application due to issues at bank or service provider; and g) technical charts not viewable
2.	Further, the SE Circular issued a revised Penalising Structure with certain additional monetary penalties introduced.	a) Penalty for failure to set up disaster recovery site. b) Penalty for failing to obtain ISO-27001 (i.e. international standard for information security management systems) certification by Specified Members.
3.	Notably, an upper limit has been added on the imposition of monetary penalty for certain non-compliances. To clarify, the progressive monetary penalty would continue to apply basis the number of occurrences of a Technical Glitch in a given financial year.	The upper limit of monetary penalty has been added for the following non-compliances: a) for non-reporting of Technical Glitches (i.e. up to a maximum of INR 5,00,000 for Specified Members and INR 1,00,000 for other brokers) b) for failure by Specified Members to conduct disaster recovery drills (i.e. up to a maximum of INR 10,00,000 for Specified Members.) c) For failure by Specified Members to obtain ISO certifications within time. (i.e. up to a maximum INR 5,00,000 for Specified Members)
4.	Additionally, while considering imposition of direction of no on-boarding of clients on crossing 6 or more Technical Glitches in a given financial year, only those Technical Glitches will be considered which have affected more than 5% active client (basis certification by the auditor)
Reporting requirements
1	Irrespective of whether the relevant Technical Glitch is subject to the revised Penalising Structure, it is noteworthy that the same will still be reportable and the revised Penalising Structure will still be applicable to such non-compliance.
	In terms of the formats for the three-fold reporting requirements, while the formats largely remain the same, certain modifications have been made.	Such modifications to the reporting formats include: a) relocating point 6 (nature of network connectivity issues) from the 1^st Report format to the 2^nd Report; and b) streamlining the 3^rd Report format to resemble the format shared as part of the annexure to the SEBI Circular 2022. Resultantly, certain information heads from the previous 3^rd Report format have now been removed.

Conclusion

The SE Circular read with the SE FAQs constitute a reasonable effort towards enhancing regulatory clarity while maintaining oversight; the exemptions of certain Technical Glitches from the revised Penalising Structure and the imposition of upper limits on specific monetary penalties are positive developments that contribute to a more balanced regulatory framework.

Nevertheless, the definition of ‘Technical Glitches’ remains overly broad, posing compliance challenges and necessitating a more precise delineation to ensure effective enforcement. Furthermore, the reporting obligations continue to apply to all Technical Glitches, irrespective of their materiality and whether the same was on account of a third-party or MII, thereby sustaining the associated compliance burden. Even in case of Technical Glitches caused by the systems of an MII, the SE FAQs suggest that only if the MII reports the glitch, the same would not amount to a glitch on the broker’s part and hence would not be subject to the revised Penalising Structure. Thus, the current framework does not fully resolve existing deficiencies.

In this regard, a definition which includes a minimum percentage of impacted clients by such Technical Glitch could be more effective. Further, waiving reporting obligations for Technical Glitches which are immaterial and/or caused by MIIs could ease compliance burdens. Additionally, given that there is a limit to the oversight a stock broker can have over third-party systems, the revised Penalising Structure for a Technical Glitch caused by such third party may require to be further revisited.

That said, the SE Circular read with the SE FAQs provide important clarifications and are a relief to the operations of stock brokers. Further refinements would be a welcome addition towards a more proportionate and practical enforcement framework.

This Prism has been prepared by:

Pulkit Sukhramani

Partner

Anshuman Sugla

Senior Associate

For more details, please contact [email protected]

[1] SEBI circular no.: SEBI/HO/MIRSD/TPD-1/P/CIR/2022/160 (SEBI | Framework to address the ‘technical glitches’ in Stock Brokers’ Electronic Trading Systems).

[2] National Stock Exchange of India: circular ref. no. 93/2022; BSE Limited: circular ref. no. 20221216-52; Metropolitan Stock Exchange of India: circular ref. no. MSE/IT/12759/2022; Multi Commodity Exchange of India Limited: circular ref. no. MCX/TECH/726/2022; National Commodity & Derivatives Exchange Limited: circular ref. no. NCDEX/RISK-010/2022.

[3] National Stock Exchange of India: circular ref. no. 24/2025; BSE Limited: circular ref. no. 20250328-88; Metropolitan Stock Exchange of India: circular ref. no. MSE/INSP/16949/2025; Multi Commodity Exchange of India Limited: circular ref. no. MCX/TECH/161/2025; National Commodity & Derivatives Exchange Limited: circular ref. no. NCDEX/Member Tech Compliance-006/2025.

Tags Capital Markets, IPO, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, SEBI, Securities

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Brief facts

Issue

Findings and analysis

Conclusion

The Securities and Exchange Board of India redefines High Value Debt Listed Companies

Key Changes

Conclusion

Proposed Framework on Securitisation of Stressed Loans

Overview of the Proposed PCE Framework

Conclusion

Investment in listed debt securities (rated A or below) by Category II Alternative Investment Funds will be considered as investments in unlisted securities

Governance of technical glitches in stock broker’s electronic trading systems – moving towards a more balanced framework

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