July 27th, 2026

A. Case Laws

[A.1] Exclusion of offence under section 452 from the purview of section 435 does not decriminalise the provision

The High Court of Kerala in Tata Coffee Ltd v. Ramla (July 1st, 2026) explained the impact of excluding section 452 from the jurisdiction of special courts under section 435.

Section 452 of the Companies Act, 2013 deals with punishment for wrongfully keeping or misusing company property. In simple terms, it provides a legal process for a company to get back its assets (cash, laptop, cars, official housing, documents, etc.) when an officer or employee refuses to return them or uses them illegally. An officer or employee (current or former) violates Section 452 if they have wrongfully taken possession of any company property or cash without permission, or they refuse to return (withhold) company property or cash after leaving the job or when asked or misuse company property or cash for personal gain or for anything not allowed by the company’s rules or the law. For example, an employee quits or is terminated but refuses to vacate company provided accommodation (a flat or house) or refuses to hand back a company car/laptop. The offences under section 452 are punishable with a fine ranging between rupees one lakh to five lakhs. Also, the court can order the person to return the property/cash within a fixed timeline, and if the person fails to comply with the court’s order to return the property, they can face up to 2 years in jail.

It may be noted that the offences under section 452 are excluded from the jurisdiction of special courts under section 435. Thus, a question arose before the high court that whether this exclusion decriminalises the provision of section 452 and if no criminal court has jurisdiction over such matters.

After analysing the provisions of sections 452 and 435, the high court held that the offence under Section 452 of the Companies Act, 2013 is expressly excluded from the offences which the Special Courts constituted under Section 435 of the said Act are to proceed with for the purpose of speedy trial. A reading of Sections 435 and 436 of the Companies Act, 2013, would make it clear that the various offences envisaged under the said Act, except the one under Section 452 are to be dealt with by the Special Court. However, the express exclusion of the offence under Section 452 from the purview of the Special Courts would not decriminalise the provision. On the other hand, it will make the competent Judicial Magistrate empowered to impose the fine of not less than Rs. 1,00,000/- and extending to Rs. 5,00,000/- as the competent court. Therefore, the court further held that observation of the lower court that no criminal court has jurisdiction to take cognisance of an allegation under Section 452 of the Companies Act, 2013, after the amendment made to the said Act in the year 2020, is apparently erroneous. Likewise, the finding of the learned Magistrate that Section 452 of the Companies Act, 2013, has been decriminalised by the Amendment Act of 2020 is baseless and unsustainable.

[A.2] Suspension of administrative action does not extinguish criminal process

The High Court of Telangana in Vivimed Labs Ltd v. Central Bureau of Investigation (June 10th, 2026) decided an important point that mere suspension of administrative action cannot extinguish criminal process. The court held that a stay on criminal investigation initiated by CBI cannot be granted even if the same court in an earlier proceeding had allowed declassification of petitioner’s NPA account as fraud account. The court clarified that classification/declassification of NPA as Fraud was an administrative decision as per the Master Directions of the RBI whereas registration of FIR and criminal investigation there upon by CBI was exercise of statutory powers.

Factual Matrix

In this case, a pharmaceutical manufacturing company (petitioner) was operating for over three decades. It accumulated significant debt following an expansion project and the disruptions of the COVID-19 pandemic. Its outstanding dues led to its loan account being classified as a Non-Performing Asset (NPA) on January 28, 2021. Then following a forensic audit that flagged financial irregularities and fund diversion, the respondent bank issued a show-cause notice and subsequently categorised the company’s account as ‘Fraud’ under Reserve Bank of India (RBI) guidelines.

In its earlier proceedings, the company challenged the ‘Fraud’ classification and the high court granted an interim stay on August 20, 2025, suspending the administrative operation of this ‘Fraud’ classification. However, before and independently of this banking measure, State Bank of India lodged a criminal complaint prompting the Central Bureau of Investigation (CBI) to register an FIR for economic offences and corruption. Pursuant to this ongoing criminal probe, the CBI executed coordinated search and seizure operations at the company’s premises.

In the present proceedings, the company contested the CBI raids, arguing that the underlying fraud classification was legally suspended.

Decision

After considering the facts, the court ruled that an interim stay on administrative actions does not extinguish or bar independent statutory criminal investigations. The court affirmed that regulatory banking measures and penal law operate in separate, distinct spheres. This decision underscores that administrative protections or stays against banking classifications cannot be used to stall legitimate criminal investigations or search warrants involving economic fraud and the misappropriation of public funds.

[A.3] The procedure in private placement cases must be strictly complied in chronological order The RoC Delhi order dated June 4th, 2026 in case of M/s Centricity Wealth Tech Private Limited underscored that the chronological compliance of procedure in private placement is a must to avoid any penalties. In this case, the company committed following two defaults:

• The letters for offering shares were issued before the filing of shareholders resolution with the RoC; and
• The funds received from investors were converted into other financial instruments like FD even before formal allotment and filing of allotment return.

Both these defaults were held to be breach of sections 42(3) and 42(6) of the Companies Act, 2013, and Rule 14(8) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

As per the section 42(3), a company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company. As per Rule 14(8) a company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry. Thus, the circulation of offer letter before filing of resolution with the RoC was viewed as a violation of these provisions.

As per proviso to section 42(6), monies received on application under private placement shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than for adjustment against allotment of securities or for the repayment of monies where the company is unable to allot securities. Thus, conversion of allotment money into other financial instruments without formal allotment and filing of allotment return was viewed as violation of this provision.

B. Cover Story

[B.1] The extent of due diligence by merchant bankers during IPO

Recently, I came across an article authored by Animesh Joshi titled as “IPO Due Diligence: Everything Reasonable, Not Everything Possible” that made me think about the extent to which due diligence should be carried out by the merchant bankers during IPO process. Whether everything possible is actually possible? What can be constituted as everything reasonable? After studying this article and some of the judgements/orders on this aspect, I have prepared a study note reproduced in the following paragraphs.

Definition and Regulatory Framework

Due diligence refers to the reasonable care and effort expected from a professional while discharging an obligation under the law. In the context of an IPO, a particular standard of reasonable care and professionalism is expected from the Merchant Banker (Lead Manager). The investors during the IPO process take the information disclosed in the prospectus on its face, and make investment in the shares. This where the fiduciary role of merchant banker begins. They act in a fiduciary role, coordinating between the issuer, regulatory bodies, and investors to ensure market integrity.

Regulation 24 of the SEBI (ICDR) Regulations requires the draft offer document to contain all material disclosures that are true and adequate to enable informed investment decisions. It mandates that the lead manager exercise due diligence to satisfy itself about all aspects of the issue. Further, the SEBI (Merchant Bankers) Regulations require the exercise of proper care and independent professional judgement.

Thus, it becomes relevant to analyse the extent to which the merchant bankers are expected to conduct due diligence and the professional standard expected from them.

The Standard: “Everything Reasonable, Not Everything Possible”

The standard for due diligence is a professional judgement standard, asking whether a reasonable, careful, and independent professional would have acted similarly under the same facts. Due diligence does not require a merchant banker to be a “bloodhound” or to guarantee that no facts were missed. Following the Supreme Court’s interpretation in Chander Kanta Bansal v. Rajinder Singh Anand, we can consider that due diligence means doing everything reasonable, not everything possible. However, the degree of care expected cannot be put into a straight-jacket formula and will differ depending on the specific circumstances of the issue.

Moving Beyond Passive Reporting

A critical takeaway from SEBI’s orders is that a merchant banker cannot remain passive. The Lead Manager is not a mere compiler of information. It must examine, question, and satisfy itself that disclosures are not misleading. In PG Electroplast case, SEBI found that acting as a mere ritual or passively reporting whatever the issuer provides is a failure of duty. The Lead Manager must independently test material disclosures and ask further questions.

In Bharatiya Global Infomedia case, SEBI held that an issuer cannot escape responsibility by blaming the merchant banker, but similarly, the merchant banker cannot rely solely on issuer certificates as a substitute for its own diligence.

The Three Layers of Reasonable Due Diligence

Reasonable due diligence can be categorised into three distinct layers of activity:

1. Verifying Disclosures: Checking board approvals, financial records, related party disclosures, material contracts, and the Objects of the Issue.

2. Testing Inconsistencies: If a fact appears incomplete or commercially unusual, the merchant banker must go beyond the checklist. The obligation is not satisfied just because an issuer undertaking is available.

3. Acting on New Facts: The duty continues if new developments arise, such as new litigation, regulatory action, or vendor concerns.

Specific Areas of Heightened Scrutiny

SEBI’s approach shows that the merchant banker’s obligation becomes stricter when red flags appear. Say, objects of the issue cannot be checked mechanically. For example, in the Trafiksol matter, SEBI highlighted the need to verify the credentials and capability of third-party vendors to whom IPO proceeds are proposed to be paid.

Similarly, for inter-corporate deposits (ICDs) and bridge loans, merchant bankers must identify undisclosed liabilities. In the Bharatiya Global and PG Electroplast cases, the failure to disclose pre-IPO ICDs that were repaid using IPO proceeds was a major due diligence lapse.

In cases involving, related party transactions, merchant bankers must apply independent mind to identify relationships. In Bharatiya Global, the lead manager failed to identify that a property purchase was a related party transaction because they relied on a routine letter from the company rather than performing deeper checks.

Further, due diligence does not end with the filing of the offer document. As seen in the Veerkrupa Jewellers matter, the lead manager must act promptly if they become aware of misleading publicity, such as aggressive YouTube promotions or online articles that deviate from the Prospectus.

Consequences of Failure

Failure to exercise proper care can lead to severe regulatory consequences. In the PG Electroplast matter, the merchant banker and its officials were prohibited from taking up new assignments for a specified period due to their failure to identify material misstatements and fund siphoning. SEBI emphasises that investors invest based on the faith that the merchant banker has conducted proper professional scrutiny.

References

Chander Kanta Bansal v. Rajinder Singh Anand, (2008) 5 SCC 117 PG Electroplast Ltd., SEBI order dated December 28th, 2011 Bharatiya Global Infomedia Ltd, SEBI order dated August 8th, 2014 Trafiksol ITS Technologies Ltd, SEBI order dated December 3rd, 2024 Veerkrupa Jewellers Limited, SEBI order dated May 29th, 2026

C. Legislative Update

[C.1] SEBI Amends Buy-back Regulations

The SEBI has amended the Buy-Back Regulations vide its amendment dated July 1st, 2026. It was an awaited regulation after SEBI has paused buy back of securities through open market last year and had issued a proposal to re-introduce market with strict checks earlier this year.

The major areas where amendments have been carried out by SEBI are discussed as follows:

1. Cap on Open Market Buy-Backs

Companies buying back shares directly through stock exchange order books are restricted to less than 15% of their paid-up capital and free reserves. Basically, SEBI is nudging companies away from open-market buy-backs and toward tender offer routes. Open-market buy-backs often fail to benefit retail investors because larger institutional traders dominate daily order books. Tender offers ensure every shareholder gets an equal, pro rata opportunity to sell at a fixed premium.

2. Optional Merchant Banker Requirement (Regulation 24A)

Now, hiring an expensive Merchant Banker to manage the buy-back is optional. Companies can handle buy-backs in-house by redistributing specific compliance tasks to existing stakeholders:

• Secretarial Auditor: Certifies regulatory compliance and due diligence.
• Statutory Auditor: Manages escrow accounts and bank guarantees.
• Stock Exchanges: Verify volume-weighted average prices (VWAP).
• Compliance Officer: Oversees the destruction/extinguishment of shares.

This amendment will significantly slash transaction costs and procedural friction, especially for routine and smaller buy-backs. However, it shifts significant legal responsibility and oversight burdens onto secretarial and statutory auditors.

3. Promoter Share Lock-In (ISIN Freezing)

Shares held by promoters or promoter group members shall be completely frozen at the depository level from the day the board/shareholders approve the buy-back until the offer closes. This amendment shall eliminate insider trading risks and market manipulation. With this, the promoters cannot use favourable buy-back announcements to pump the share price and quietly sell off their untendered personal holdings during the offer window.

4. Strict Minimum Public Shareholding (MPS) Bar

A company cannot propose a buy-back if the resulting reduction in total shares drops the public float below the mandated minimum public shareholding threshold (typically 25%). This prevents controlling promoters from using buy-backs as a back-door mechanism to squeeze out minority shareholders or force an involuntary delisting without following formal delisting norms.

5. Fast-Tracked Timelines & Direct Digital Intimations

The Public Announcement must happen within 2 working days of resolution and the shareholders must receive an electronic notification within 1 working day of the announcement. Further, the offer shall open within 4 working days of the announcement.

This fast tracked timeline will shorten the overall period of market uncertainty, reduce share price volatility during the buy-back window, and ensures retail shareholders receive direct, actionable alerts rather than missing notices hidden in newspaper advertisements.

D. News

[D.1] SEBI has set up a helpdesk facility for settlement process

The Securities and Exchange Board of India (SEBI) has introduced the ‘Settlement Help desk Facility’ to streamline and simplify the process for entities and individuals seeking to resolve their regulatory proceedings through settlement. The facility shall be operating under the framework of the SEBI (Settlement Proceedings) Regulations, 2018.

The main objective of the help desk facility is to assist applicants and prospective applicants in navigating procedural compliance. The help desk will provide guided support for three main procedural aspects: (1) Filing of applications, (2) Guiding applicants on calculating the indicative settlement amount in accordance with the Settlement Regulations and (3) Enabling stakeholders to check the status of pending settlement applications.

The service can be utilised by any person or their duly authorised representative who proposes to seek a settlement for specified regulatory proceedings. The requests must be submitted in a prescribed form via a dedicated email address: settle - help @ sebi. gov. in. SEBI has endeavoured to respond to queries within five working days. However, vague or non-specific requests shall be excluded.

All guidance, clarifications, or computations provided by the help desk shall be strictly informal, non-binding, and facilitative in nature. The responses from the help desk shall not constitute formal legal or regulatory advice, interpretation, confirmation, or an official opinion of SEBI. Further, they do not restrict SEBI’s overarching powers or create any legal rights, estoppel, or legitimate expectations in favour of the applicant.