The Securities and Exchange Board of India (“SEBI”) has recently introduced significant changes to the governance framework for listed companies through an amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).
The amendments were signaled by various consultation papers issued by SEBI over the last 6-9 months, including consultation papers on ‘Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015’ and ‘Strengthening Corporate Governance at Listed Entities by Empowering Shareholders – Amendments to the SEBI (LODR) Regulations, 2015’.
The amendments are largely effective from July 14 and broadly seek to enforce higher disclosure and governance standards for listed entities. The changes materially alter key provisions of the LODR Regulations, including the: (i) disclosure framework, by inter alia introducing objective criteria for determining material events/ information, reducing the timeline for making disclosures and mandating additional disclosures (including in relation to agreements binding listed entities and addressing market rumours), (ii) disclosure and approval requirements for special rights granted to shareholders, (iii) approval requirements for business transfer agreements undertaken outside the scheme of arrangement route, and (iv) validity of permanent board seats and timelines for filling vacancies of directors and KMPs.
These are detailed below.
Disclosure Framework – (Regulation 30 read with Schedule III):
- Objective criteria for determining materiality of disclosable events – (Regulation 30(4) read with Paragraph B of Part A of Schedule III):
Listed entities must mandatorily disclose events or information whose value or expected impact in terms of value exceeds:
(a) 2% of turnover, as per the last audited consolidated financial statements;
(b) 2% of net worth, as per the last audited consolidated financial statements, except in case the arithmetic value of the net worth is negative;
(c) 5% of the average of the absolute value of profit or loss after tax, as per the last three audited consolidated financial statements.
This new requirement seems to arise from the regulator’s grouse that disclosures by listed entities are often inadequate, inaccurate, misleading or delayed. SEBI clearly expects listed entities to make timely disclosures of material information without prevaricating or taking subjective positions on whether they are disclosable. SEBI, in the recent past, initiated proceedings against listed entities for non-disclosure of information ranging from lender objections to buyback proposals, tax demands and deemed material events – the changes notified aim to plug some of these perceived ambiguities.
- Mandatory disclosures of continuing events/ information – (Regulation 30(4)):
Events or information that previously escaped disclosure due to the subjective disclosure criteria are now disclosable if they meet the new objective criteria and are subsisting. This will require listed entities and their compliance officers to undertake a review of all undisclosed matters involving the listed entity and assess afresh whether they now become disclosable. In undertaking such review, it may be helpful to also refer to SEBI’s circular dated September 9, 2015, which provides guidance on when information becomes disclosable.
- Materiality policy – (Regulation 30(4)):
Listed entities are required to ensure that their materiality policy does not dilute the requirements of the LODR Regulations. The policy must also include provisions that assist employees to identify and report disclosable information. This amendment potentially broadens obligations to identify and report potentially disclosable information to management of listed entities.
- Revised disclosure timelines for material events/ information – (Regulation 30(6)):
Listed entities are required to make disclosures of material events/ information as soon as reasonably possible and no later than:
a) 30 minutes from the closure of the board meeting in which the decision pertaining to the event or information has been taken;
b) 12 hours from the occurrence of the event or information if it emanates from within the listed entity;
c) 24 hours from the occurrence of the event or information if it does not emanate from within the listed entity.
This amendment significantly reduces the timeline previously available to listed entities to make disclosures and paints events that were disclosable on a mandatory basis or subjective basis (i.e. or Paragraph A and Paragraph B events) with the same broad brush. Listed entities will need to ensure that they have in place a robust mechanism for timely internal reporting, particularly for items that are triggered by an external action (eg. litigation, MAE events, etc.) rather than voluntary actions (eg. execution of an agreement or board approval of a transaction).
- Disclosure of agreements binding listed entities – (Regulation 30A read with Paragraph 5A of Part A of Schedule III):
Agreements to which certain covered persons are parties (i.e. shareholders, promoters, promoter group entities, related parties, directors, KMPs and employees of a listed entity or of its holding, subsidiary and associate company) are now disclosable if they directly, indirectly, actually or potentially: (i) impact the management or control of the listed entity, or (ii) impose any restriction or create any liability upon the listed entity, are required to be disclosed. Such agreements are also disclosable if they have the purpose and effect outlined above, regardless of their actual or potential impact. Agreements creating obligation on parties to ensure that the listed entity shall or shall not act in a particular manner are also disclosable.
The disclosure obligation also applies regardless of whether the listed entity is a party. If a subsisting agreement covered by the disclosure requirements exists, it must be disclosed by the listed entity. If the listed entity is not a party to the agreement, the other parties must inform the listed entity of such agreement, and the listed entity must, thereafter, disclose the agreement with its salient features, including a link to the webpage where the details of such agreements are available. While the amendments contain an exception for agreements executed in the normal course of business, this is qualified by language that could narrow its scope.
This amendment seeks to achieve a dual purpose: (i) vis-à-vis shareholders, it addresses information disparity and increases transparency, and (ii) vis-à-vis the listed entity, it ensures that the listed entity is made aware of the obligations that have been imposed upon it by the parties to such agreements – that said, the enforceability of such agreements with respect to the listed entity (though not inter-se the parties to the agreement) will potentially continue to be tested and challenged on the grounds of privity.
- Verification of rumours – (Regulation 30(11)):
The top 100 listed entities (from October 1, 2023) and the top 250 listed entities (from April 1, 2024) are required to confirm, deny, or clarify any reported events or information in mainstream media which is not general in nature and which indicates that rumours of an impending specific material event or information are circulating amongst the investing public, as soon as possible and no later than 24 hours from the reporting of the event or information. If such events are confirmed, the entity should also provide the current stage of such event or information.
While the erstwhile LODR Regulations provided that a listed entity may, on its own initiative, confirm or deny any reported event or information to the stock exchanges, voluntary confirmations and denials were quite infrequent. This amendment accordingly imposes hard obligation on certain classes of companies, and is seemingly in line with the position SEBI took in its order in the matter of M/s Reliance Industries Limited, dated June 20, 2022.
- Other additional disclosures – (Paragraphs A and B of Part A of Schedule III):
The amendments mandate several additional disclosures by listed entities to stock exchanges including:
a) material announcements through social media or mainstream media by directors, promoters, KMPs or senior management;
b) frauds, defaults or arrests involving promoters, directors, senior management;
c) material regulatory or statutory action or notices including search and seizure, investigations, suspensions, debarments etc.;
d) detailed disclosures in case of KPM resignations;
e) indisposition or unavailability of the MD or CEO for a specified period;
f) voluntary revision of financial statements or the board’s report.
Shareholders’ approval of special rights – (Regulation 31B):
Any special rights that are granted to shareholders of a listed entity (other than any rights granted to a RBI regulated/ registered financial institution under a lending agreement or to a SEBI registered debenture trustee under a subscription agreement, in case they have become shareholders under such agreements) will require shareholders’ approval by special resolution once every 5 years starting from the date of grant of such rights. For any such rights existing as on July 14, 2023, such approval will have to be obtained by July 14, 2028. While the amendments do not define the term “special rights”, it is likely that any veto, governance or other material rights relating to the listed entity will be disclosable and require approval. Further, there appears to be no grandfathering, and even special rights granted to promoters/ investors in the past which are subsisting (i.e., prior to the coming into force of the amendments) will now require periodic shareholders’ approval.
Public shareholder approval for business transfer agreements – (Regulation 37A)
A listed entity which sells, leases, or disposes of the whole or substantially the whole of its undertaking outside of a scheme of arrangement mechanism (eg, by way of a business transfer agreement), will now require the prior approval of its shareholders (by special resolution), with the votes cast by the public shareholders in favour of the resolution exceeding the votes cast by public shareholders against the resolution. Further, the disclosure requirements for such a transaction undertaken by a listed entity has also been strengthened to provide that the shareholder notice shall disclose: (i) the object of and commercial rationale; and (ii) the use of the proceeds arising from the sale. Presently, such a transaction undertaken outside the scheme route only requires a special resolution of shareholders under the Companies Act.
SEBI has granted a conditional exemption for such a transaction between a listed entity and its wholly owned subsidiary whose accounts are consolidated, provided however that the exemption will fall away and public shareholder approval will need to be obtained if: (i) there is a further transfer by the wholly owned subsidiary; or (ii) the listed entity dilutes its shareholding below 100% in the wholly owned subsidiary to which the undertaking was transferred, in each case, prior to the occurrence of the said action. There is also no outer time period for the fallaway of the exemption provision.
Director permanency and vacancies:
- Director permanency on the board of a listed entity – (Regulation 17(1D)):
With effect from April 1, 2024, shareholders’ approval will be required for a directors’ continuation on the board at least once every 5 years from the date of their appointment or reappointment. For directors serving as of March 31, 2024, without shareholders’ approval for the last 5 years or more, such approval must be obtained in the first general meeting after March 31, 2024. This requirement is however not applicable to (i) whole-time director, (ii) MD, (iii) manager, (iv) independent director, or (v) director retiring by rotation, in each case, if there subsists an obligation to obtain shareholders’ approval and the same has been complied with, (vi) director appointed pursuant to the order of a court / tribunal, (vii) nominee director of the Government of a listed entity, other than a public sector company, (viii) nominee director of a financial sector regulator, or (ix) director nominated by a RBI regulated / registered financial institution under a lending arrangement (normal course) or nominated by a SEBI registered debenture trustee under a subscription agreement.
This amendment serves to introduce a check-in mechanism, and prevents non-performing non-executive directors from holding a board seat on a permanent basis by virtue of contractual arrangements.
- Filling the vacancy of the director, CEO, CFO, compliance officer – (Regulation 17(1E), Regulation 26A and Regulation 6(1A)):
Vacancies to the office of the MD, whole-time director, manager CEO, CFO and compliance officer are to be filled within 3 months from the date of vacancy. Any interim appointment will have to comply with the laws applicable to a fresh appointment. In case of any other director, this shall be applicable in case the listed entity does not fulfill the minimum composition requirements as set out under Regulation 17(1) of the LODR Regulations. If the listed entity becomes non-compliant with the minimum composition requirement due to expiration of the term of office of any director, the resulting vacancy will have to be filled by the listed entity not later than the date such office is vacated.
This 3 month timeline prescribed under the Amendment Regulations is more stringent than the 6 month timeline prescribed under Section 203 of the Companies Act, for filling vacancies in the office of whole-time KMPs. The stricter timeline could, inter alia, result in the listed entity facing practical challenges to find persons suitable to the roles who are capable of occupying the same in such short notice.
Do watch this space over the next few weeks for a detailed analysis of implications of some of these newly introduced changes.