Legal Updates (Feb 16 – Feb 21, 2026)

If the contract doesn’t stipulate for payment of interest on a delayed payment, a party is not entitled to the same. The object of the Interest Act, 1978 is to mandate the payment of interest to the parties in the absence of, or any vacuum in the agreement, or where the interest so fixed is contrary to law, being in the nature of an exorbitant charge 

The Supreme Court in the case of Kerala Water Authority vs T I Raju [SLP(C) NO(s). 17823/2023] dated February 09, 2026, has held that when the contract doesn’t stipulate for payment of interest on a delayed payment, a party is not entitled to the same. The Court observed that the object of the Interest Act, 1978 is to mandate the payment of interest to the parties in the absence of, or any vacuum in the agreement, or where the interest so fixed is contrary to law, being in the nature of an exorbitant charge. 

The case arose from a contract executed in April 2013 between the Kerala Water Authority and the Respondent-contractor for the construction of a sewage treatment plant at the Government Medical College, Calicut. The work was completed in July 2014, but the principal amount of Rs. 86.64 lakh was released only in March 2016 following a writ petition. The Respondent subsequently filed a civil suit seeking interest at 14% per annum for the delay. 

The Trial Court allowed the claim and the High Court later reduced the interest to 9%, prompting the Kerala Water Authority to move to the Supreme Court, challenging the impugned finding in view of the express clause mentioned in the contract which stated that payments would be subject to availability of funds and seniority of bills, and that “no claims or interest for damages whatsoever shall be made for the belated settlement of claims.” When the matter reached the High Court, it invoked Section 3(1) of the Interest Act, 1978, to grant interest on delayed payment. 

The Supreme Court, however held that the Interest Act 1978 applies only where a contract is silent on interest or leaves a vacuum. Section 3(3) of the Act expressly bars the award of interest where a contract prohibits it. It also rejected reliance on Section 34 of the Code of Civil Procedure, observing that the provision deals only with the rate of interest once entitlement is established and does not create a right to interest when barred under the contract. 


An order levying damages under Section 85-B of the Employees’ State Insurance Act, 1948 (ESI Act) cannot be set aside on the grounds of being ‘mechanical’, if inspection revealed that the wage and attendance records were manipulated and did not reflect the correct employment position

The Bombay High Court in the case of Deputy Regional Director vs Aashu Engineering Works [First Appeal No. 756 of 2011] dated February 17, 2026, has held that an order levying damages under Section 85-B of the Employees’ State Insurance Act, 1948 (ESI Act) cannot be set aside on the grounds of being ‘mechanical’ if the adjudicating authority has considered the specific submissions made by the employer in response to the show cause notice. The Court clarified that the onus is on the employer to plead specific mitigating factors (such as the number of defaults, extent of delay, etc.) before the authority. 

The Court emphasised that it cannot subsequently fault the authority for not considering factors that were never raised, and that the judicial power to interfere with the quantum of damages is discretionary and should not be exercised in cases where the employer has not provided compelling reasons for the default and where there is evidence of malafide intention.

The Court found the Employees State Insurance Court’s (ESI Court) observation that the order under Section 85-B was passed mechanically to be incorrect. The Court also noted that the original order had provided detailed reasons for not accepting the submissions made by the respondent. 

The Court observed that the respondent had not raised factors such as the number of defaults, extent of delay, or frequency of defaults in its reply to the show cause notice. Therefore, the ESI Court could not expect the appellant to have considered these factors, and the respondent should have pleaded these points if they wanted the benefit of such considerations. 

The Court noted clear evidence of malafide intention on the part of the respondent, as an inspection revealed that the wage and attendance records were manipulated and did not reflect the correct employment position. Further investigation showed that a wage registers for the year 1997 was prepared in 2001 on forms bearing a 7-digit phone number, which was only introduced in 1999. 

The Court opined that the appellant had exercised its discretion judiciously, and the damages levied of Rs. 27,849 were significantly lower than the maximum permissible amount, which could be up to the amount of arrears of Rs. 96,705. Further, the appellant had already taken a liberal view by considering the due date of contribution from the date of the visit notice rather than the actual due date. 

Therefore, while acknowledging that a court can interfere with the quantum of damages, the Court clarified that such discretion must be exercised based on the specific facts of the case and the reasons advanced by the employer. 


A dispute arising from a purely contractual relationship, governed by the terms of an agreement, cannot be converted into a criminal proceeding for cheating or criminal breach of trust where the essential ingredients of these offences are absent 

The Calcutta High Court in the case of Tata Capital Finance Ltd vs State of West Bengal [CRR 2354 of 2023] dated February 13, 2026, has held that a dispute arising from a purely contractual relationship, governed by the terms of an agreement, cannot be converted into a criminal proceeding for cheating or criminal breach of trust where the essential ingredients of these offences are absent. The Court clarified that specifically, there must be evidence of dishonest intention from the inception for cheating and a clear entrustment of property for criminal breach of trust. 

Furthermore, the Court clarified that an alleged violation of regulatory guidelines (like those from the RBI) does not automatically give rise to penal consequences under the Indian Penal Code for a matter rooted in a contract. The Court also reaffirmed the legal principle that charges for cheating (Section 420 IPC) and criminal breach of trust (Section 406 IPC) cannot be sustained simultaneously for the same transaction. The Court therefore allowed the criminal revisional application and quashed the proceedings against the petitioners.

The Court observed that the subject matter of the complaint arose purely out of an alleged violation of the terms and conditions of the loan agreements between the parties. It noted that the relationship was governed by these agreements, which also contained an arbitration clause that the complainant did not invoke. Thus, the Court affirmed the principle that a contractual dispute or a mere breach of contract per se should not lead to the initiation of a criminal proceeding. 

The Court held that charges under Sections 406 and 420 of the IPC cannot be maintained simultaneously in the same breath, and explained that if a complainant alleges an offence of criminal breach of trust, it cannot be said in the same breath that the accused also committed the offence of cheating. The two offences are distinct and cannot co-exist simultaneously for the same transaction. 

Further, the Court stated that the distinction between a mere breach of contract and the offence of cheating is a fine one, with the decisive factor being the accused’s intention at the time of inducement. To constitute cheating, there must be a fraudulent or designed intention from the very beginning of the contract’s formation. While subsequent conduct can be a factor in inferring this initial intention, it cannot be the sole test. The Court found that the complaint failed to satisfy these basic ingredients. 

For an offence of criminal breach of trust, the Court clarified that mere proof of entrustment is sufficient, where an offender is lawfully entrusted with property and then dishonestly misappropriates it. Thus, in the present case, the Court concluded that there was no entrustment of money upon the petitioners, who were merely the loan sanctioning authority. The entrustment was pursuant to the loan agreement against the property, and the onus for the same never shifted to the petitioner company. 

The Court emphasised that the police report and the Magistrate’s order were based on an alleged violation of RBI/NHB guidelines prohibiting foreclosure charges. However, the loan agreements were executed in November 2013 and November 2014, which was prior to the notification in question. 

More importantly, the Court held that a violation of RBI guidelines per se cannot attract penal action under the IPC, as the core allegation was about an excess payment during foreclosure which was governed by the terms of the agreement. The Court also pointed out that the investigating officer’s report about the violation of rules should have been verified with available materials, which was not done. 


Section 5 of the Maharashtra Stamp Act, 1958, cannot be invoked to dissect a composite scheme sanctioned by a single NCLT order into ‘distinct matters’ or ‘transactions’ to levy separate stamp duty on each component of the merger 

The Bombay High Court in the case of Schaeffler India vs Chief Controlling Revenue Authority [Writ Petition No. 7496 of 2023] dated February 18, 2026, has ruled that Section 5 of the Maharashtra Stamp Act, 1958, cannot be invoked to dissect a composite scheme sanctioned by a single NCLT order into ‘distinct matters’ or ‘transactions’ to levy separate stamp duty on each component of the merger. The ruling came while observing that the instrument chargeable to stamp duty is the order of the NCLT sanctioning a scheme of amalgamation, and not the underlying transactions of merger contained within that scheme. 

The Court explained that the stamp duty is attracted to the instrument as a whole, and it is impermissible for stamp authorities to assess the underlying transactions for the purpose of levying duty. The Court clarified that the instrument is the NCLT, Mumbai order, which is a single instrument liable for stamp duty once, subject to the single statutory cap.

The Court observed that the statutory framework, through a conjoint reading of Section 2(g)(iv), Section 3, and Article 25(da) of the Maharashtra Stamp Act, 1958, clearly indicates that the instrument chargeable with stamp duty is the order of the NCLT sanctioning the scheme, and not the underlying scheme of amalgamation itself. Thus, the Court held that the impugned orders from the stamp authorities were legally unsustainable because they assessed the stamp duty payable on the underlying transactions of merger, rather than on the NCLT, Mumbai order which was the instrument lodged for adjudication. 

On the application of Section 5 of the Stamp Act, 1958, the Court found the revenue authorities’ application to be erroneous. It explained that Section 5 applies where a single instrument relates to several distinct matters. Since the authorities had treated the amalgamation of INA Bearings and LuK India as two distinct matters within the NCLT Mumbai order, the Court held that applying Section 5 requires delving into the underlying transaction, which is impermissible in the case of an NCLT sanction order. 

The Court agreed with the decision of the Gujarat High Court in Ambuja Cements Limited vs Chief Controlling Revenue Authority [C/SR/1/2020 decided on 10/02/2023], which held that a scheme of amalgamation sanctioned by a court cannot be brought within the sweep of Section 5 of the Stamp Act. 

The Court also pointed out that the stamp authorities in Mumbai do not have the jurisdiction to assess stamp duty on the NCLT, Chennai order, as it did not originate in Maharashtra and was not ‘received’ in the state as per the Stamp Act. The mere reference to the amalgamation of LuK India in the NCLT, Mumbai order (for the purpose of confirming the fairness of the composite scheme) does not amount to bringing the NCLT, Chennai order into Maharashtra. The Court clarified that whether stamp duty was paid on the NCLT, Chennai order is a matter for the authorities in Chennai and is immaterial for assessing the duty on the NCLT, Mumbai order. 


The remedy under Section 7 of the Insolvency & Bankruptcy Code (IBC) to initiate the Corporate Insolvency Resolution Process (CIRP) is not discretionary but mandatory, leaving the adjudicating authority with no option but to admit the application once the existence of a debt and a default is established 

The Supreme Court in the case of Power Trust vs Bhuvan Madan [Civil Appeal No. 2211/2024] dated February 18, 2026, has held that the remedy under Section 7 of the Insolvency & Bankruptcy Code (IBC) to initiate the Corporate Insolvency Resolution Process (CIRP) is not discretionary but mandatory, leaving the adjudicating authority with no option but to admit the application once the existence of a debt and a default is established.

The Court observed that the Adjudicating Authority is not required to go into the inability of a corporate debtor to pay its debt. This is a clear departure from the scheme of winding up envisaged under Section 433(e) of the erstwhile Companies Act, 1956 which required the Adjudicating Authority to come to a finding with regard to the inability of the company to pay the debt and thereby arrive at a requisite satisfaction whether it is just and equitable to wind up the company. The Code restricts the scope of enquiry for admission of an insolvency process by a financial creditor merely to the existence of default of a debt due and payable and nothing more. 

The Court further observed that when the financial creditor initiates the insolvency process for the purposes of admission, the Adjudicating Authority is only to ascertain the existence of a default from the records of the information utility or the evidence furnished by the financial creditor within fourteen days from the receipt of such application. At this stage, neither is a corporate debtor entitled nor is the Adjudicating Authority required to examine any dispute regarding the existence of such debt. This significantly reduces the scope of enquiry at the stage of a time-bound admission of an insolvency process by a financial creditor.


REGULATORY UPDATES

The RBI has amended the Foreign Exchange Management regulations for 2026, updating the external commercial borrowing (ECB) framework 

The Reserve Bank of India (RBI) vide its Notification No. FEMA 3(R)(5)/2026-RB dated February 09, 2026, has notified the “Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026” and made amendments to the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Notification No. FEMA 3(R)/2018-RB dated December 17, 2018). 


Key Definitions (Regulation 2)

• Benchmark Rate: This is defined as a widely accepted interbank rate or Alternative Reference Rate (ARR) of a 6-month tenor for foreign currency (FCY) ECBs. For Indian Rupee (INR) denominated ECBs, it is the prevailing yield of a Government of India security of corresponding maturity. 
• Control: For companies, ‘control’ aligns with the definition in the Companies Act, 2013. For LLPs, it means the right to appoint a majority of designated partners who have control over all LLP policies. 
• Cost of Borrowing: This includes the rate of interest, other fees, expenses, charges, and guarantee fees. It explicitly excludes commitment fees and statutory taxes payable in India. 
• Indian Entity: This is defined as a company incorporated under the Companies Act, 2013, a body corporate established under a Central/State Act, or an LLP registered under the Limited Liability Partnership Act, 2008. 
• Real Estate Business: The definition clarifies that this involves the purchase, sale, or lease of land with a view to earning profit. It excludes activities like the development of industrial parks, integrated townships, SEZs, infrastructure sector projects, and construction-development projects.

Restriction on End-Use of Borrowed Funds (Regulation 3A)

A new Regulation 3A has been inserted, which prohibits the use of borrowed funds for specific purposes in India, including: (i) Chit funds and Nidhi companies; (ii) Real estate business and construction of farmhouses, with specific conditions for construction-development projects and industrial parks; (iii) Agricultural and animal husbandry, with specified exceptions like floriculture, pisciculture, and services related to agro sectors under controlled conditions; (iv) Plantation activities, except for tea, coffee, rubber, cardamom, palm oil, and olive oil trees; (v) Trading in Transferrable Development Rights (TDRs); (vi) Transacting in listed or unlisted securities, except for strategic corporate actions like mergers, acquisitions, or demergers; (vii) Repayment of a domestic INR loan that was originally used for a restricted end-use or is classified as a Non-Performing Asset (NPA); and (viii) On-lending for any of the prohibited purposes.

Substitution of Schedule I – Revised External Commercial Borrowing (ECB) Framework

• Eligible Borrowers – Any resident Indian entity (other than an individual) incorporated, established, or registered under a Central or State Act is eligible. Entities under restructuring or investigation can also raise ECB, subject to specific permissions or disclosures. 
• Recognised Lenders – An eligible borrower can raise ECB from a person resident outside India, a foreign branch of an Indian bank, or a financial institution in an IFSC.
• Borrowing Limit – An eligible borrower can raise ECB up to the higher of: (a) USD 1 billion (outstanding ECB), or (b) 300% of its net worth as per the last audited standalone balance sheet. This limit does not apply to borrowers regulated by financial sector regulators. 
• Minimum Average Maturity Period (MAMP) – The MAMP for an ECB is three years. However, manufacturing sector entities can raise up to USD 150 million with a MAMP between one and three years. The MAMP requirement is waived for conversion to non-debt instruments, refinancing, debt waiver, and certain corporate actions.
• Cost of Borrowing – The cost must align with prevailing market conditions. For ECBs with a MAMP of less than three years, the cost must comply with the ceiling specified for Trade Credits.
• Security for ECB – ECBs can be secured by a charge on immovable, movable, financial, and intangible assets, or by a guarantee. The creation of such security is subject to conditions like obtaining a ‘No Objection Certificate’ from existing lenders if the asset is already encumbered.
• Refinancing & Conversion – An existing ECB can be refinanced with a fresh ECB, provided the MAMP requirement of the original borrowing is not breached. ECBs can be converted into non-debt instruments subject to compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and consent from the lender.
• Reporting Requirements – Borrowers must use ‘Form ECB 1’ to obtain an LRN, ‘Revised Form ECB 1’ to report changes, and ‘Form ECB 2’ to report drawdowns and debt servicing. Failure to report for four consecutive quarters can lead to the borrower being classified as an “untraceable borrower”, which must be reported to the RBI and the Directorate of Enforcement.

Borrowing by Individuals from NRIs/OCIs (Regulation 6(B))

The amendment modifies the rules for resident individuals borrowing in INR from an NRI or a relative who is an OCI cardholder. Such borrowing is permitted subject to the conditions that: (i) The loan amount must be received via inward remittance or by debit to the lender’s NRE/NRO/FCNR(B)/SNRR account; and (ii) The borrowing must be on a non-repatriation basis, meaning both interest and principal repayment must be credited only to the lender’s NRO account. 

Click here to read/ download the original notification 


The SEBI has clarified obligations for Credit Rating Agencies (CRAs) when rating financial instruments fall under the purview of financial sector regulators (FSRs) other than SEBI 

The Securities and Exchange Board of India (SEBI) vide its Circular No. SEBI/HO/DDHS/DDHS-PoD-2/I/4685/2026 dated February 10, 2026, while addressing to all registered Credit Rating Agencies (CRAs), Debenture Trustees, issuers of listed/proposed-to-be-listed non-convertible securities, recognized stock exchanges, and depositories, has clarified obligations for CRAs when rating financial instruments fall under the purview of financial sector regulators (FSRs) other than SEBI, as permitted by Regulation 9(f) of the SEBI (Credit Rating Agencies) Regulations, 1999. 

Key updates: 

Separation of Grievance Handling and Disclosures: The CRAs must use separate email IDs for grievances related to SEBI-regulated activities and those under other FSRs. Further, the CRAs must maintain distinct webpages or sections on their websites for disclosures related to SEBI-regulated activities and those under other FSRs. Additionally, while resources (manpower, IT, etc.) can be shared, the email IDs for grievances must remain separate. 

Minimum Net Worth Requirements: The minimum net worth required under SEBI’s CRA Regulations must not be affected by the CRA’s activities under other FSRs. Also, any net worth stipulations by other FSRs are in addition to SEBI’s requirements. 

Disclosure of Activities and Advertising/Marketing Material: The CRAs must disclose on their website the list of all activities carried out, along with the name of the regulator for each activity. Further, the advertising/marketing material for activities under other FSRs must be separate from that for SEBI-regulated activities. Also, for activities under other FSRs, CRAs must clearly disclose that SEBI’s investor protection and grievance/dispute redressal mechanisms are not available. 

Disclosures in Rating Reports and Press Releases: The rating reports and press releases/rationales must mention the name(s) of the regulator(s) for the rated instruments. They must also clearly state that SEBI’s investor protection and grievance/dispute redressal mechanisms are not available for such ratings. Further, if a common rating report/press release is issued, there must be clear segregation and labelling of SEBI-regulated instruments and those under other FSRs. 

Dealing with Clients: Before commencing activities under other FSRs, CRAs must make an upfront written disclosure to clients that the activity falls under another FSR, and include this in rating agreements/engagement letters. The CRAs must also obtain written confirmation from clients that they understand the nature of the activity, risks involved, and the non-availability of SEBI’s investor protection/grievance mechanisms. For existing clients with ongoing activities or outstanding ratings under other FSRs, CRAs must send written intimation specifying the nature of the activity, risks, and non-availability of SEBI mechanisms, and confirm compliance to SEBI after sending these intimations. 

Internal Audit Report: The CRAs undertaking activities regulated by other FSRs must submit an undertaking as part of their half-yearly internal audit report, confirming compliance with CRA Regulations and relevant circulars. This undertaking must be reviewed and approved by the CRA’s Board of Directors. 
As far as effective dates are concerned, the provisions under Paragraphs 2.1 (separation of grievance handling/disclosures) and 2.5.2 (intimation to existing clients) come into effect 12 months from the date of the circular. Rest, all other provisions come into effect 60 days from the date of the circular.

Click here to read/ download the original circular 


The RBI has directed lenders to provide customers with written details of the recovery agents assigned to their cases, ensure that agents are not given sales-style targets that may push them toward harsh recovery practices, and refrain from engaging recovery agents in cases where the customer has already lodged a grievance with the bank 

The Reserve Bank of India (RBI) vide its Press Release: 2025-2026/2099 dated February 12, 2026, has issued draft amendment directions on the Conduct of Regulated Entities (REs) in Recovery of Loans and Engagement of Recovery Agents. The draft seeks to strengthen governance, transparency, and customer protection in loan recovery practices adopted by banks. 

The comments / feedback on the draft Amendment Directions may be submitted by the regulated entities and members of public / other stakeholders on or before March 6, 2026.

Under the draft directions, banks must put in place a comprehensive policy covering: (i) Recovery of loans; (ii) Engagement of recovery agents; and (iii) Taking possession of security. This policy must be structured, documented, and aligned with RBI’s regulatory expectations.

Key updates: 

As far as eligibility and due diligence of recovery agents are concerned, the draft inculcates the criteria for selection and engagement, due diligence requirements prior to empanelment, verification of antecedents of recovery agents and their employees, and ongoing verification at defined periodic intervals. 

As far as scope of activities and code of conduct is concerned, the draft mandates a clearly defined permitted activities of recovery agents, a formal Code of Conduct for recovery agents and their employees, as well as the behavioural and ethical standards to prevent harassment or misconduct. 

As far as performance monitoring and control mechanisms are concerned, the draft has called for a performance evaluation standard for recovery agents, inspection and audit mechanisms, and internal control systems to ensure compliance with statutory and regulatory requirements. 

As regards non-compliance and penal measures, the draft has streamlined the procedures to be followed in case of violations, penal actions against non-compliant recovery agents, and suspension or termination protocols. 

Further, as far as recovery in case of death of ‘Borrower or Guarantor’ is concerned, to ensure fair and respectful treatment of legal heirs and stakeholders, the draft directions specifically address procedures for: (a) Recovery of dues upon the death of borrowers or guarantors; (b) Appropriate and sensitive handling of such cases; and (c) Compliance with legal and regulatory provisions. 

The draft regulations also proposed that banks engaging recovery agents must establish a robust due diligence process in line with RBI instructions, and ensure recovery agencies verify antecedents of their representatives and employees involved in recovery. 

The draft regulations also mandated that the banks are required to establish mechanisms to identify borrowers facing repayment difficulties, engage proactively with such borrowers, and provide guidance on available resolution or recourse options. This reflects a shift toward customer-centric and resolution-oriented recovery practices.

Click here to read/ download the original press release