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FIG Paper No 59 – AI in Indian Financial Services: Balancing Innovation with Accountability and Regulation

Summary: As artificial intelligence reshapes the contours of India’s financial landscape, regulated entities find themselves navigating a delicate balance between harnessing transformative innovation and managing its inherent risks spanning algorithmic bias, model opacity, and systemic concentration. The RBI’s establishment of the FREE-AI committee signals a decisive regulatory commitment to responsible AI governance, anchored in principles of accountability, fairness, and explainability. The paper ultimately calls upon regulated entities to embed these imperatives at the very foundation of their AI frameworks, underpinned by robust data governance and a culture of institutional vigilance.

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Rethinking the Appellate Role of Regional Director: Is a Deeper Reform Needed?

Summary: The Regional Director occupies a consequential yet structurally deficient position in India’s corporate regulatory framework. Vested with quasi-judicial powers, the office was designed to bring regulatory decision-making closer to businesses. In practice, it is hampered by procedural informality, understaffing, and the absence of codified rules. The Corporate Laws (Amendment) Bill, 2026, proposes a significant expansion of the RD’s jurisdiction, including  fast-track mergers and the restoration of struck-off companies, without addressing these foundational weaknesses. A recent LinkedIn case exposes a deeper flaw and raises a serious concern where the RD is asked to independently review ROC orders while remaining embedded within the very administrative hierarchy that issued them. This blog examines these concerns and calls for urgent reforms.

The Regional Director’s office plays a powerful yet often overlooked role in India’s corporate regulatory architecture, operating in the shadows of the Ministry of Corporate Affairs (“MCA”) and the Registrar of Companies (“ROC”). Established under Section 396 of the Companies Act, 2013 (“Act”), and governed by the Company (Registration Offices and Fees) Rules, 2014, the Regional Director (“RD”) functions as a quasi-judicial and supervisory authority across designated geographic zones. While intended to decentralise corporate governance, there are certain structural issues that bear consideration.

Interestingly, RD is not defined under the definition clause of the Act, neither is any reference made about its role or powers under Section 396 of the Act. The definition was introduced in the Companies (Adjudication) of Penalties Rules, 2014. RD is defined as a person appointed by the Central Government in the Ministry of Corporate Affairs. The proposed insertion of Section 2(73A) and the amendments to Section 396 of the Act through the Corporate Laws (Amendment) Bill, 2026 (“Bill”), aim to address this legislative gap.

The Companies Act, 2013, assigned the Regional Director a wide-ranging portfolio, including handling applications for shifting of registered offices across states (Section 13), approving conversion of public companies into private companies (Section 14), overseeing inspection and investigation of companies (Sections 206–209), receiving and acting upon complaints, and supervising the functioning of ROCs within the region. This decentralisation was intended to bring regulatory decision-making closer to businesses and reduce the burden on the central MCA apparatus. However, experience shows that there are often delays at the RD’s office.

The Quasi-Judicial Dilemma

Arguably, the most complex aspect of the RD’s functioning is its quasi-judicial character. When the RD hears objections to a company’s request to relocate its registered office or examine complaints from creditors and employees, it must adhere to the principles of natural justice by hearing all parties, considering evidence, and issuing well-reasoned orders. In practice, however, the proceedings are often informal and arbitrary due to lack of uniform hearings procedure. While representation by counsel is permitted, its modalities are undocumented.

The judiciary has noted this problem. In several High Court decisions, Regional Directors’ orders are overturned. This is a structural defect. The Act conferred adjudicatory powers but failed to establish necessary procedures, forcing the RD to improvise, and litigants to suffer.

Inspection and Investigation: The Blunt Instrument

Sections 206-209 of the Act grant the RD substantial investigative powers, including requesting books and papers, ordering special audits, conducting inspections, and referring matters to the Serious Fraud Investigation Office (“SFIO”). However, the use of these formidable tools has been inconsistent.

Inspection powers are often invoked for complaints rooted in shareholder disputes or factional boardroom battles. Disgruntled minority shareholders or promoter-group adversaries weaponise the RD’s office to harass companies or directors. Since there is no system to filter or screen complaints at the pre-inspection stage, the simple act of filing a complaint imposes procedural costs on the company, regardless of its merit. A more advanced regulatory framework would require the RD to conduct a preliminary assessment before issuing notices or calling for documents.

The underuse of these powers in cases of genuine corporate fraud is equally concerning. The RD’s office, resource-constrained and often technically understaffed, lacks the forensic capacity to pursue complex financial malfeasance.

The Staffing and Infrastructure Inadequacy

The RD offices face chronic resource shortages and remain understaffed relative to their jurisdictional workload. Since 2013, company registrations in each jurisdiction have grown exponentially, but staffing has not kept pace; significantly hampering the ability of offices in fulfilling their statutory duties.

While digitisation has helped improve filing and communication, the MCA21 portal does not fully support RD operations. Many proceedings still depend on physical filings, unpredictable personal hearings with uncertain scheduling, and paper correspondence. This reliance is outdated for a law intended for modern times.

Enter the 2026 Bill: Opportunity or Overreach?

The Bill, introduced in the Lok Sabha and referred to a 31-member Joint Parliamentary Committee (“JPC”), aims to amend the Act, and the Limited Liability Partnership Act, 2008, with a stated emphasis on decriminalisation, digitisation, and regulatory rationalisation. While it reflects the Government’s reform intent and the need for careful legislative scrutiny, a major change is the proposed expansion of the jurisdiction of RD office, which warrants careful scrutiny.

Fast-Track Mergers:

The most consequential expansion of the RD’s role pertains to Section 233, which governs fast-track mergers. By extending eligibility to include mergers between holding companies and their not wholly-owned subsidiaries, as well as fellow subsidiaries, and a broader class of unlisted companies, the Bill widens the contours of corporate restructurings that may bypass National Company Law Tribunal scrutiny and utilise the administrative route under the RD. Simultaneously, the creditor approval threshold is rationalised from 90% to 75%, and for certain classes of companies, the required shareholder approval may be set at 75% by value. 

This is a significant structural change. The fast-track merger process permits parties to avoid elaborate procedural safeguards embedded in Sections 230-232, including the NCLT’s independent judicial oversight. Now, the RD takes on the role of gatekeeper for a broader range of restructurings, many involving complex valuations, minority shareholder interests, and creditor rights that need rigorous scrutiny.

Restoration of Struck-Off Companies: A Welcome but Risky Transfer

The authority to restore a struck-off company is proposed to shift from the NCLT to the RD to expedite administrative relief, provided the restoration application is submitted within three years of the company’s removal. This change is intended to streamline both the closure and restoration processes, with the RD route eliminating the backlog associated with the NCLT. While decongesting the NCLT is a legitimate objective and the RD pathway may be suitable for straightforward cases, restoring a struck-off company can involve complex issues, including ongoing litigation, third-party rights, and creditor interests.

Adjudication Machinery: The In-House Mechanism Problem

The Bill shifts several minor procedural lapses from criminal liability to civil penalties, handled by an In-House Adjudication Mechanism (“IAM”). Critics argue that this could undermine judicial oversight and allow for arbitrary and inconsistent penalties. Although the RD is not the sole officer in this IAM architecture, expanding the penalty adjudication framework will increase the quasi-judicial work within regional offices. The Bill also introduces a Recovery Officer with powers to attach and sell movable and immovable property, and in extreme cases, arrest and detain defaulters who fail to pay fines. Since these coercive powers come from an administrative hierarchy lacking codified procedural rules, the JPC must scrutinise this aspect carefully. Notably, there is no deadline prescribed for the RD to resolve appeals against ROC orders under Section 454, nor is it possible to file a second appeal against RD decisions. This leaves petitioners with only one recourse: filing a writ petition in the High Court under Article 226 of the Constitution.

The recent case of LinkedIn Technology Information Private Limited offers a pointed illustration of this structural infirmity. The ROC passed a penalty order against LinkedIn and its directors in 2024 for alleged violations under Sections 89 and 90 of the Act. LinkedIn appealed before the Regional Director, Northern Region, who dismissed the appeal in early 2026, affirming the ROC’s reasoning. Aggrieved, LinkedIn filed a writ petition before the High Court of Delhi, which stayed both orders. The ROC order, RD dismissal, and Delhi High Court writ, is not merely a litigation narrative; it is a symptom of a deeper structural failure in India’s corporate appellate architecture. The RD, as the statutorily designated appellate authority over ROC orders under Section 454, is itself a creature of the MCA and operates within the same administrative hierarchy as the ROC. In institutional terms, it is part and parcel of the very regulatory apparatus whose orders it is called upon to review. The LinkedIn case exemplifies a pattern where the appellate authority endorses the primary authority’s reasoning without meaningful independent scrutiny. Such an outcome is structurally foreseeable when both bodies are embedded within the same chain of command. What the framework urgently requires is the creation of a genuinely independent judicial or quasi-judicial appellate body that is insulated from the MCA’s administrative hierarchy. In the absence of such a forum, companies and their directors are compelled to approach the High Court by way of writ petitions. Writ petitions are both resource-intensive and procedurally ill-suited as a first port of call for technical regulatory disputes. The necessity of reforming this appellate architecture is no longer a theoretical concern as demonstrated in the LinkedIn matter.

Reform Imperatives

The RD’s office requires urgent, systemic reform across four dimensions:

  • Procedural codification: A dedicated set of Regional Director Procedural Rules should be developed to establish clear timelines, hearing procedures, representation rights, and standardised order formats. Borrowing from the NCLT practice would be a great starting point.
  • Capacity building: To take the investigative mandate seriously, there is a critical need for significant investment in technical manpower, including accountants, forensic specialists, and legal officers.
  • Accountability mechanisms: Statutory timelines for disposing applications must be enforceable, including provisions for deemed approval or escalation to prevent indefinite pendency.
  • Filtering of complaints: A screening committee or a preliminary inquiry process must be institutionalised to distinguish between genuine complaints and those filed for collateral purposes.

Conclusion

The Office of the RD embodies a regulatory vision that remains, as yet, unrealised in practice. Occupying a unique position at the intersection of regulation, adjudication, and investigation, the Office is statutorily entrusted with a broad and consequential mandate and yet its execution of each of these functions continues to be constrained by structural deficiencies and inadequate institutional support. If the Office is to fulfil the role envisaged for it under the Act, and to command the credibility and operational efficiency that India’s corporate regulatory framework demands, it must undergo a deliberate and meaningful transformation from a body that processes procedural compliance into one that actively drives regulatory governance. Achieving this demands sustained commitment on three distinct fronts: legislative reforms; administrative investment that furnishes it with the resources and capacity necessary to discharge those powers effectively; and an honest institutional reckoning with the shortcomings that have, for too long, gone unaddressed.

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E-Khata Conundrum In Karnataka: The Bureaucratic Afterlife of a Civil Decree

Summary: This blog examines the Karnataka High Court’s judgment in PS Ashok Kumar v. District Registrar, Tumkuru, wherein the High Court categorically directed the State’s administrative machinery that a court’s decree is, in fact, meant to be enforced. The High Court’s nine-point guidelines read as something of a sacred scripture for beleaguered decree holders. Readers will understand how Karnataka’s property registration ecosystem, often riddled with bureaucratic red tape, may benefit from enhanced clarity on the interplay between the sanctity of a Court’s decree and the procedural demands of administrative compliance.

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Amended Cyber Security Guidelines for Insurance Sector: Key Amendments and What They Mean for Regulated Entities

Summary: On April 6, 2026, IRDAI issued certain amendments to its 2023 Information and Cyber Security Guidelines for insurance sector, while retaining the core structure of the guidelines. This article covers the key changes to the guidelines and their implications for regulated entities such as expanded Board accountability, introduction of IT Steering Committee, enhanced independence of CISO, and targeted relaxations for Foreign Reinsurance Branches etc

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SEBI Order Penalises Outsourcing of Core Functions: Structuring Lessons for Asset Management Industry

Summary: This blog analyses a recent SEBI order dated May 26, 2026, which penalised a portfolio manager for outsourcing core investment functions to a technology company under the guise of “technology consulting”. SEBI held that the prohibition on outsourcing core activities under the Outsourcing Circular and Applicable Laws is absolute, and that “investment decisions” extend beyond model portfolio approval to include all downstream steps such as quantities, timing, and client-level trade execution. The portfolio manager and its key personnel were restricted from onboarding new clients for 21 days and were collectively penalised Rs 42,00,000. The article draws broader structuring lessons for the asset management industry, cautioning that SEBI will look at substance over form, that fee structures linked to performance fees signal participation in the investment process, and that individuals in control will face personal liability.

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FIG Paper No 58: RBI Issues Operating Framework for Facilitating Outward Remittance Services by Non-Bank Entities

Introduction

The Foreign Exchange Department, Reserve Bank of India (“RBI”), on May 13, 2026, issued a circular titled ‘Operating framework for facilitating Outward Remittance services by non-bank entities through Authorized Dealer (Category I) Banks (“AD Banks”) in India’ (“Outward Remittance Circular”), which:

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FIG Paper No. 57 (VDA Series 11): India Digital Assets Round-Up: Recent Regulatory and Market Developments

Summary: This FIG Paper examines recent global regulatory and market developments in digital assets, including Hong Kong’s first stablecoin licences, countries finalising their digital assets regulatory frameworks, and BIS warnings on stablecoin-driven dollarisation. It then analyses India’s evolving response through the revised FIU-IND registration regime, tightening tax reporting and enforcement trends, and the RBI’s evolving regulatory response to stablecoins.

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Summary: This blog explores SEBI’s informal guidance on the creation and invocation of pledged shares, particularly for financing of ESOPs, and the expansion of compliance officers’ obligation to determine what constitutes a “bona fide” transaction.

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Summary: Prime Minister Narendra Modi undertook a landmark visit to the Nordic region from May 17-19, 2026, as part of a broader five-nation European tour that also encompassed the UAE, the Netherlands, and Italy. The visit marked the first time an Indian Prime Minister had travelled to Norway in over four decades. In Sweden, the two countries elevated bilateral relations to a Strategic Partnership and adopted a Joint Action Plan for 2026-2030, focusing on economic and security resilience, emerging technologies, trusted connectivity, and sustainability-linked cooperation. In Norway, India and Norway elevated their bilateral relationship to a Green Strategic Partnership, marking a major expansion of cooperation across climate technology, renewable energy, maritime economy, digital systems, and innovation. At the 3rd India-Nordic Summit in Oslo, India and the Nordic countries decided to elevate their relationship to a Green Technology and Innovation Strategic Partnership. The visit signals India’s determination to build future-oriented partnerships across Europe’s northern frontier.

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Whether payment made pursuant to an Arbitral Award followed by a Court Decree be liable to GST ?  Analysis of landmark Bombay High Court Judgment

There are moments in tax litigation when the revenue administration machinery seems to lose sight of first principles. The Bombay High Court judgment in Tata Sons Private Limited v. Union of India & Others, pronounced on April 30, 2026, is one such moment. The Court’s firm, unambiguous rejection of a INR 1,524 crore Goods and Services Tax (“GST“) demand will be cited for years as a corrective to a particular species of over-reach that has afflicted indirect tax administration in India.

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