LODR Disclosure Regime

The Securities and Exchange Board of India (SEBI) has recently issued a consultation paper on review of the disclosure requirements as applicable to listed companies. Regulation 30 of the Listing Obligations and Disclosure Requirements (LODR) Regulations prescribe the material events or information that is to be duly disclosed by listed companies to the stock exchanges. It is divided into two parts – Para A contains events that are deemed material, and Para B contains items that are to be disclosed basis application of the materiality policy of the respective companies. SEBI has indicated several reasons for review of the current regime – including investor complaints on asymmetrical disclosure of information and company complaints on lack of uniform guidance.

The proposed revisions are as follows:

A]  A key change proposed in the revisions relates to Para B events. Events or information specified under Para B of Schedule III of the LODR were required to be disclosed upon application of the company’s materiality policy. While the LODR provided generic guidance on the contents of the materiality policy, companies were expected to come up with their own reasoned guidelines on what is material. This, however, did not happen and majority of the materiality policies are templates of the generic guidance stated in Regulation 30(4) of the LODR. Disclosures under Para B are predictably sparse due to the unbridled discretion available to the companies. The revisions introduce a materiality threshold for items specified in Para B if the value or expected impact in value terms exceeds the lower of (a) 2% of turnover, (b) 2% of net worth or (c) 5% of three-year average of profit after tax. They are mandatorily required to be disclosed irrespective of the contents of the materiality policy of the company. This change pretty much blurs the lines between Para A and Para B events and considerably reduces the discretion available with the companies on whether certain events or information ought to be disclosed.

B] In an attempt to improve the quality of materiality policies, the revisions also prescribe that the materiality policy should be drafted such that ground level employees could easily identify items that need to be escalated to the key managerial personnel for onward disclosure. Though the proof of the pudding is in the eating – one cannot help but be skeptical that this guidance will result in replication of Para A and Para B events in the individual materiality policies, as guidance for the ground level employees.

C] An interesting revision relates to market rumours. The top 250 listed entities will hereinafter be expected to actively scout for rumours relating to the company in any form of media and, if they have a material effect on the listed entity, confirm or deny the same. This may be challenging as most companies routinely engage in activities which may not have crystallised into a disclosure requirement and any such confirmation or denial could be premature.

D] Cyber security incidents or breaches are now required to be disclosed in the quarterly compliance report on corporate governance in the prescribed format.

E] The following events have been added to the mandatory events in Para A of Schedule III of the LODR:

  • Any mass communication in relation to a listed entity by its directors, promoters, key managerial persons or senior management, which is not already made available by the listed company in the public domain. It is mentioned that the idea behind this insertion is for the information to be available in one place. It is unclear if this is necessary from a good governance point of view, as there is no materiality qualifier on the said information and if it has already been communicated to the masses, it is part of the public domain, and there is no real need for it to be further collated by the listed entity.
  • Regulatory actions have been moved from Para B to Para A, thereby reducing the discretionary element relating to such disclosures provided they relate to any imposition of fines, inspection or investigation, etc. of the listed entity. This appears to be a very wide disclosure requirement with no materiality threshold. For example, most regulatory actions, irrespective of materiality, involve penalties and fines. It is not clear if investor interest will be served by disclosing all such matters irrespective of materiality.
    • Voluntary revisions of financial statements under Section 131 of the Companies Act.
    • In case of resignation of key managerial personnel, senior management or directors, the entire letter of resignation along with detailed reasoning is required to be disclosed.
    • If the managing director or chief executive officer is indisposed for more than one month, a disclosure is mandatory.

F] Some new items have been added to Para B of Schedule III as well, such as delay or default in payment of any fines to any authority. Additionally, certain modifications have been made to existing events in Para A and Para B. They are chiefly in the nature of tightening of language and reducing of ambiguities. There is also an attempt to do away with disclosures on lending to wholly-owned subsidiaries and inter-se transfer of shares between a listed entity and its wholly-owned subsidiary.

G] Lastly, the timelines for disclosure have been further tightened, ranging from 30 minutes to 12 / 24 hours in most instances.