Across India, each subsequent phase of the lockdown has permitted a responsible increase in economic activity. As companies re-start their operations, they continue to assess the impact of Covid-19 pandemic on their businesses and operations, which is rapidly and continuously evolving. Listed entities are particularly conscious of their disclosure obligations, more so after the Securities and Exchange Board of India (“SEBI”) issued a circular on May 20, 2020 (the “Circular”), that outlined the relevant considerations for companies in relation to the disclosures on the impact of Covid-19 on their businesses, performance and financials. The Circular is not only a restatement of the current principle-based disclosure regime, but is also indicative of the regulatory expectation on disclosures going forward in relation to impact of Covid-19 pandemic as it evolves.
Existing disclosure norms
The overarching principles governing disclosures are captured under Regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “LODR”), which mandate a listed entity to ensure accurate and timely disclosure on all material matters including the financial situation, performance, ownership and governance of the listed entity.
Regulation 30 of the LODR further requires a listed entity to make disclosures of material events and information. While certain events have been deemed to be material and thus have to be necessarily disclosed, other events require a listed entity to apply the guidelines on materiality laid down by its board of directors to assess whether a disclosure is warranted. One instance that requires application of a company’s policy on materiality is disruption of operations due to natural calamity, force majeure or events such as strikes, lockouts etc. This had triggered the various disclosures by companies in relation to shutting down of their factories/ disruptions in operations owing to the Covid-19 pandemic, since the beginning of the lockdown.
The Circular – In brief
Drawing reference to the regulatory actions across the world requiring timely and accurate disclosure by companies of the impact of Covid-19 (as far as possible), SEBI, in the same vein, has encouraged listed entities in India to evaluate the impact of the Covid-19 pandemic on their business, performance and financials, both qualitatively and quantitatively, to the extent possible and disseminate the same. SEBI has also given an illustrative list of information that the listed entities may consider disclosing, subject to the application of their materiality policy as the impact of Covid-19 would differ from company to company.
The list set out in the Circular includes impact of the pandemic on the business and operations, ability to maintain operations (including the offices/units functioning and closed down), schedule for restarting the operations, steps taken towards ensuring smooth functioning and estimation of the future impact of Covid-19 on operations. The primary focus area for disclosures has been the financial impact (which includes, inter alia, impact of the pandemic on capital and financial resources, profitability, liquidity position, assets, ability to service debt, internal financial reporting and control, supply chain, demand for its products/services), as SEBI had noted the number of entities disclosing the financial impact to be quite small. In fact, now the listed entities, while submitting the quarterly/ half-yearly/ annual (as the case may be) financial statements, may include the details on the impact of the Covid-19 pandemic in such financial statements, to the extent possible.
Given that the impact of Covid-19 pandemic continues to unfold and would require frequent updates/modification in the response strategies and plan of action adopted by companies, SEBI has also mentioned that regular updates can be provided on impact of Covid-19 by the listed entities as and when there are material developments.
The way forward
The Circular, interestingly and understandably, is worded as an “advisory” on disclosure of material impact of Covid-19 pandemic. Across the Circular, the listed entities are “encouraged” to assess the impact of Covid-19 “to the extent possible” and consider disclosing the material information. The Circular is indicative of the regulatory understanding on practicability of these disclosures as this is an unforeseen event and any evaluation by a company of the impact of Covid-19, both current and expected, is challenging. Such disclosures are especially difficult as the impact of Covid-19 on companies is evolving and its future effects remain uncertain. Moreover, the companies are still in the incipient stages of developing their response strategies. It would also be interesting to see how the impact of Covid-19 is included in the financial statements, whether as provisioning or otherwise, and the accounting issues that may arise in the process.
These disclosures would also be unique in the sense that these will contain forward looking statements on potential impact, which while not common to Indian markets (as Regulation 30 disclosures are typically limited to reporting of the facts/occurrences although there is no restrictions on forward looking statements), are significant market drivers and factors of sensitivity for investors in the US markets. Some Indian companies which have their depository receipts listed in the US also have been making forward looking disclosures in the form of “guidance”. These are heavily regulated and carefully drafted statements made by boards of listed companies. In our view, the forward looking elements of the disclosures made pursuant to the Circular will especially need to keep in view legal accountability and commercial and reputational consequences of these disclosures and will need to be carefully worded to ensure they are specific, meaningful (i.e. not generic or boilerplate disclosures) and backed up with strong reasoning so that these adequately withstand the test of time and hindsight bias. It is expected that in addition to the markets, the regulator will also be keenly watching these disclosures, especially to ensure that there is no abuse and that these disclosures are not designed to impact the price of securities or create a false market. The regulator may also sharpen the lens on insider trading surveillance given that the impact of pandemic in some companies may constitute unpublished price sensitive information.
All in all, while the actual impact of Covid-19 pandemic will depend on many factors beyond a company’s control and current knowledge, this Circular aims at bridging the information gap created due to the pandemic. It also re-iterates the underlying principle for all disclosure norms that any material information which has an impact on investment and voting decisions of investors, is disclosed to all and not selectively disseminated, while bringing in elements of “guidance” to be given out by Indian companies in times of crisis such as these.
 See, (i) Public Statement, U.S. Securities and Exchange Commission dated April 8, 2020, available at: https://www.sec.gov/news/public-statement/statement-clayton-hinman; (ii) CF Disclosure Guidance, Topic No. 9, Division of Corporation Finance, dated March 25, 2020, available at: https://www.sec.gov/corpfin/coronavirus-covid-19; (iii) Recommendations to Financial Market Participants, European Securities and Market Authorities, available at: https://www.esma.europa.eu/about-esma/covid-19.